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. Emerson Enterprises, Inc., a nationwide electronics company, is considering purchasing a smaller regional electronics manufacturer,...

. Emerson Enterprises, Inc., a nationwide electronics company, is considering purchasing a smaller

regional electronics manufacturer, Midwest Electronics, Inc. Emerson Enterprises’ analysts

project that the merger will result in incremental free cash flows as follows:

Year

Free Cash Flow (FCF)

t = 1

$4 million

t = 2

$5.5 million

t = 3

$6.75 million

t = 4

$25 million

The Year 4 Free Cash Flow (FCF) listed in the table above includes a horizon value of $15 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it is undertaken. The applicable Weighted Average Cost of Capital (WACC) for this transaction is 12%. What is the value today of Midwest Electronics, Inc. to Emerson Enterprises?

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Answer #1

Year Value $ Value today is Present value of cashflows discounted at WACC. Computation of the Present value of cashflows :- C

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