Acquirer Company's management believes that there is a 60% chance that Target Company's FCFF will grow at 20% per year during the next 5 years from this year's level of $5 million. Sustainable growth beyond the fifth year is estimated at 4% per year. However, they also believe that there is a 40% chance that cash flow will grow at half that annual rate during the next 5 years and then at a 4% rate thereafter. The discount rate is estimated to be 15% during the high-growth period and 12% during the sustainable growth period. Using the discounted cash flow (DCF) valuation, what is the expected value Of target company .?
Acquirer Company's management believes that there is a 60% chance that Target Company's FCFF will grow at 20% per year during the next 5 years from this year's level of $5 million. Sustainable growth beyond the fifth year is estimated at 4% per year. However, they also believe that there is a 40% chance that cash flow will grow at half that annual rate during the next 5 years and then at a 4% rate thereafter. The discount rate is estimated to be 15% during the high-growth period and 12% during the sustainable growth period. Using the discounted cash flow (DCF) valuation, what is the expected value Of target company .?
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 22P
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