1. The most recent year-end financial data for company “A”is as follows:

Revenues=$112 million; Depreciation=$7million

Operating income (EBIT) =$28 million

Earnings after taxes=$12 million Total assets=$172million

Interest bearing debt=$54 million Common equity=$40million

Shares outstanding=5.6 million Current price of thestock=$16.25

The company “B” is considering acquiring A. Theinvestment bankers believe that the acquisition is a good one evenif B were to pay a premium of 40%. Presently A’s cash flow is asfollows:

EBIT (operating profit) after taxes $17

Depreciation … 7

Total … $24

Less: capital expenditures 8

Incremental working capital 3

Free cash flow … $13

The company believes that with synergy it can grow theoperating income by 20% per year for the next 3 years and then 12%per year for the next 3 years. At the same time, it plans to holdcapital expenditures and working capital additions to a combinedincrease of only $2 million per year. At the end of 6 years, B isadvised by investment bankers the cash flow will probably grow at5% per year. The cost of capital computed by the IBs is15%.

Certain comparable data of some recent M & A is asfollows:

Equity value to book value 2.9x

Enterprise value to sales 1.4x

Equity value to earnings 15.3x

Enterprise value to EBITDA 7.8x

As B’ CFO, would you go ahead with theacquisition?