Question
In: Finance
BCC is looking to acquire ZZP Co. This investment will cost $2.3 million and is expected...
BCC is looking to acquire ZZP Co. This investment will cost $2.3 million and is expected to give BBC returns of $680,000 yearly for the next 11 years. ZZP has a beta of 2.1. The current treasury bond rate is 3.7% while the stock market return is 14.9%. Calculate the risk-adjusted discount rate for ZZP and the risk-adjusted NPV. Should BBC acquire ZZP? State your reasons.
Solutions
Expert Solution
Risk-adjusted discount rate=risk free rate+beta*(market return-risk free rate)=3.7%+2.1*(14.9%-3.7%)=27.2200%
Risk-adjusted NPV=-2.3*10^6+680000/27.2200%*(1-1/(1+27.2200%)^11)=21351.22
Acquire as NPV of acquisition is positive implying the acquisition is value accretive
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