Suppose SMG considers an acquisition that is expected to increase SMG’s free cash flow by $6...

Suppose SMG considers an acquisition that is expected to increase SMG’s free cash flow by $6 million the first year, and its contribution is expected to grow at 2.5% per year from then on. SMG has negotiated a purchase price of $66.25 million. SMG always adjusts its capital structure to maintain a constant debt-equity ratio of one. The acquisition has the same risk as SMG’s divisions, its corporate tax is 40%, its cost of debt is 5%, and its unlevered WACC is 7%.

a. Determine the net present value (NPV) of this deal via the WACC method?

b. Determine the net present value (NPV) of this deal using the APV method?

c. Determine the net present value (NPV) of this deal using the FTE method?

Solutions

Expert Solution

Only answering the first part (as per guideline), as it is not mentioned which part of the question should be answered.

jeff jeffy answered 1 year ago

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