A Firm Is Considering Acquiring a Competitor

question 87

Multiple Choice

A firm is considering acquiring a competitor.The firm plans on offering $200 million for the competitor.The firm will need to issue new debt and equity to finance the acquisition.You estimate the issuance costs to be $10 million.The acquisition will generate an incremental free cash flow of $25 million in the first year and this cash flow is expected to grow at an annual rate of 3% forever.If the firm's WACC is 13%,what is the value of this project?

• A)$40 million
• B)$50 million
• C)$60 million
• D)$70 million

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Definitions:

Average Variable Cost

The cost a company incurs to produce one additional unit of a product, calculated by dividing the total variable costs by the number of units produced.

Average Variable Cost

The cost per unit of variable inputs (like labor or materials) for producing a good, which changes with the level of output.

Fixed Cost

Costs that do not vary with the level of output or production, such as rent, salaries, or insurance.

Average Fixed Cost

The fixed costs of production divided by the quantity of output produced, illustrating how fixed costs dilute over larger production volumes.