Question

6. The table below shows the projected free cash flows of an acquisition target. Estimate the following:

a) Terminal value at the end of 2025 based on the perpetual growth equation with a 4% perpetual growth rate

b) Maximum acquisition price (MAP) as of the end of 2020 at a 9% discount rate

YEAR                                                               2021    2022   2023   2024   2025
FREE CASH FLOW ($ thousands)                  -$500      $83    $87    $89     $92

The Present Value of $1 Table (Table 3) tells us:

Period (n)        Present Value Factor at 9% Discount Rate
1                                                          .917
2                                                          .842
3                                                          .772
4                                                         .708
5                                                          .650

Answer 1

(a)-The terminal value at the end of 2025

Terminal value at the end of 2025 = FCF2025(1 + g) / (Ke- g)

= $92,000(1 + 0.04) / (0.09 – 0.04)

= $95,680 / 0.05

= $1,913,600

(b)-The Maximum acquisition price (MAP) as of the end of 2020 at a 9% discount rate

The Maximum acquisition price (MAP) is the Present Value of the future cash flows plus the present value of the Terminal flow

Year	Annual cash flows ($)	Present Value Factor (PVF) at 9.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	(500,000)	0.917	(458,500)
2	83,000	0.842	69,886
3	87,000	0.772	67,164
4	89,000	0.708	63,012
5	92,000	0.650	59,800
5	1,913,600	0.650	1,243,840
TOTAL			1,045,202

Therefore, the Maximum acquisition price (MAP) will be $1,045,202

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.