You are a partner of Private Equity Firm, Lion LLC (Acquiring firm) and you have the following information for the acquisition of the firm, ABC Corp (target firm), which is currently your project. The target firm is a private firm.
Suggested bidding price for the target = $147 million
Comparable firms of the target firm: unlevered cost of capital = 6.54%
Five year estimation of free cash flow to the firm (FCF) and interest tax shields
FCF: 13 million (t=1), 7.4 million (t=2), -5.8 million (t=3), 1.4 million (t=4), and 10.3 million (t=5)
Pre-determined Interest tax shields: $2.3 million at t=1, $2.3 million at t=2, $2.3 million at t=3, $2.7 million at t=4, $2.8 million at t=5 (assuming that cost of debt is 7% for the target firm and this rate is for the PV of tax shield)
Estimation of FCF at t=6 is $11 million (after t=6 and beyond, FCF will grow at the constant growth rate = 5% and cost of capital = 9%)
Question : Perform NPV analysis for this project using APV method. (You should include discounted cash flows for five years as well as continuation value)