Firms a and B Are Competitors

question 286

Multiple Choice

Firms A and B are competitors. Both have similar assets and business risks and are all-equity firms. Firm A has after-tax cash flow of $20,000 per year forever and firm B has after-tax cash flow of $150,000 per year forever. If the two firms merge, the perpetual after-tax cash flow will be $179,000. If the appropriate discount rate is 15% what is the MOST B will pay for A?

• A) $9,000
• B) $20,000
• C) $60,000
• D) $133,333
• E) $193,333

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Definitions:

Merit Pay

A salary increase awarded to employees based on their job performance, as a method to motivate and reward excellence.

Tenure

A status granted to an employee, usually after a specific period of service, indicating a permanent position or a guarantee of employment.

Competencies

A mix of knowledge, skills, behaviors, and attitudes that a person needs to be effective in a wide range of jobs and various types of organizations.

Performance

The act of carrying out a task or the level of efficiency and effectiveness with which it is executed.