The given table illustrates projected free cash flows of the acquisition target. Potential acquirer wishes to evaluate its maximum acquisition price at the 8% discount rate and the terminal value in year five based on perpetual growth equation with a 4% perpetual growth rate.
|
Year
|
1
|
2
|
3
|
4
|
5
|
|
Free Cash Flow
|
($800)
|
($400)
|
$0
|
$200
|
$700
|
Evaluate target's maximum acquisition price.
Evaluate target's maximum acquisition price when discount rate is 7% and perpetual growth rate is 5%.
Determine percentage change in maximum acquisition price when discount rate is decreased one percentage point and perpetual growth rate is increased one percentage point?