Firms a and B Are Competitors

question 62

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:

Filtering

The process of reducing information that passes up or down the organizational hierarchy to manage the flow and prevent information overload.

Information Overload

Occurs when an individual or organization receives too much information in a short amount of time, leading to difficulty in processing, understanding, and making decisions.

Media Richness

The degree to which a communication medium is capable of effectively conveying information, taking into account aspects like immediacy of feedback, personalization, and the use of multiple cues.

Data-Carrying Capacity

The maximum amount of data that can be transported in a specific system or network over a given period.