Problem:
Company A is considering the acquisition of a firm in the Czech Republic and would like your opinion on this. It plans to operate the firm for 3 years and then reevaluate the holding.
Free Cash flows are estimated as follows:
Year 1 - 38.63M Czech Koruna (CZK), Year 2 - 44.33 M CZK,
Year 3 - 50.48M CZK
The third year terminal value is estimated at 375M CZK.
The Czech Koruna's exchange rate is assumed to be .038 USD/CZK for each year. Company A uses a WACC of 13 % for its domestic projects. So, the PV of the FCF's for the firm is 363.78 M CZK or $13.82M. The Czech firm has 1,000,000 shares outstanding and a debt to equity ratio of 1:1. Current market price is 185 CZK per share.
Should Company A make a deal if its policy is to never exceed a 20% premium in any tender offer?
What changes in the analysis or additional analysis do you suggest before a final decision should be made?