a. Your company is evaluating a potential acquisition with annual revenue of $500 million, operating profit...

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a. Your company is evaluating a potential acquisition withannual revenue of $500 million, operating profit of $50 million andafter-tax cash flow of $30 million. Your corporate development teambelieves it has found synergies that can save $50 million in costswhich can be realized by year 3. Assuming a 10% weighted averagecost of capital what is the maximum price your company should payfor this acquisition?
b. Suppose the potential deal in a question is for a highlycyclical company at peak earnings. If there is a 40% probability ofrecession by Year 3 and the impact would be negative by 25% ofcurrent profit estimates how does this change your answer fora?

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Maximum value to be paid for the acquisition 7132millionYear123Terminal valueAfter tax Cash See Answer

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a. Your company is evaluating a potential acquisition withannual revenue of $500 million, operating profit of $50 million andafter-tax cash flow of $30 million. Your corporate development teambelieves it has found synergies that can save $50 million in costswhich can be realized by year 3. Assuming a 10% weighted averagecost of capital what is the maximum price your company should payfor this acquisition?b. Suppose the potential deal in a question is for a highlycyclical company at peak earnings. If there is a 40% probability ofrecession by Year 3 and the impact would be negative by 25% ofcurrent profit estimates how does this change your answer fora?