Problem
Your company intends to invest in Coke, a product company that facilitates beverage needs of consumer across countries . You will be able to influence Cokes's product development so that your company's marginal free cash flow will be positively impacted over the next four years, after which you are projecting no added benefit. You also project that Coke will be acquired at the end of this four-year period by a third party, at which point you anticipate obtaining a $25M capital gain on your investment. Coke is currently valued at $60M, which you should consider as its "economic" value.
Forecasted impact on your company's marginal end-of-year free cash flow ($ millions) is:
Y1 = $1.9
Y2 = $3.0
Y3 = $7.5
Y4 = $12.0
1. If you view this as a purely economic transaction based on current value, what maximum price would you be willing to pay for 15% of Coke?
2. If in addition to considering Coke current economic value, you also value the anticipated free cash flow benefits that will be derived from your influence over Coke , what is the maximum price you would now pay for 15% of the company? Use a discount rate of 12%.
3. Finally, assume that you will also receive your anticipated capital gain of $25M (on top of your original investment) at the end of Y4. If this happens, what will be your internal rate of return (IRR) on ALL cash flows you anticipate related to your investment, assuming you pay your maximum price from part b) and a capital gains tax rate of 35% in Y4?