Merger and Acquisition
Mergers and Acquisitions Quiz # 01
Basic Concepts of DCF Analysis (45 minutes)
Problem 1
You have been asked to compare three alternative investments and make a recommendation.
Project A has an initial investment of $5 million, and after-tax cashflows of $ 2.5 million a year for the next five years.
Project B has no initial investment, has after-tax cash flows of $ 1 million a year for the next ten years, and a salvage value of $2 million (from working capital).
Project C has an initial investment of $10 million, another investment of $5 million in ten years, and after-tax cashflows of $ 2.5 million a year forever.
The discount rate is 10% for all three projects.
Which of the three projects would you pick? Why? (5 points)
Problem 2
You have been asked by your management to review the pension fund of a company being considered for acquisition. The firm currently has $5 million in the fund, and expects to have cash inflows of $2 million a year for the first five years followed by cash outflows of $ 3 million a year for the next five years. Assume that interest rates are at 8%.
a. How much money will be left in the fund at the end of the tenth year? ( 5 points)
b. If you were required to pay a perpetuity after the tenth year (starting in year 11 and going through infinity) out of the balance left in the pension fund, how much could you afford to pay? ( 2 points)
Problem 3
You are analyzing a project that plans to invest $20 million in a new theme park called "HelloWorld Park". The park will take two years to build and the expenditure will also be spread out across the two years.
Today: $10 million; One year from now: $5 million; Two years from now: $5 million
Once the park is built, you expect to attract teenagers in record numbers, and have revenues of $10 million a year for the next ten years (your assumed project life). The park will cost $3 million a year to operate, and the depreciation will be $1 million a year. At the end of the ten years, it
Basic Concepts of DCF Analysis (45 minutes)
Problem 1
You have been asked to compare three alternative investments and make a recommendation.
Project A has an initial investment of $5 million, and after-tax cashflows of $ 2.5 million a year for the next five years.
Project B has no initial investment, has after-tax cash flows of $ 1 million a year for the next ten years, and a salvage value of $2 million (from working capital).
Project C has an initial investment of $10 million, another investment of $5 million in ten years, and after-tax cashflows of $ 2.5 million a year forever.
The discount rate is 10% for all three projects.
Which of the three projects would you pick? Why? (5 points)
Problem 2
You have been asked by your management to review the pension fund of a company being considered for acquisition. The firm currently has $5 million in the fund, and expects to have cash inflows of $2 million a year for the first five years followed by cash outflows of $ 3 million a year for the next five years. Assume that interest rates are at 8%.
a. How much money will be left in the fund at the end of the tenth year? ( 5 points)
b. If you were required to pay a perpetuity after the tenth year (starting in year 11 and going through infinity) out of the balance left in the pension fund, how much could you afford to pay? ( 2 points)
Problem 3
You are analyzing a project that plans to invest $20 million in a new theme park called "HelloWorld Park". The park will take two years to build and the expenditure will also be spread out across the two years.
Today: $10 million; One year from now: $5 million; Two years from now: $5 million
Once the park is built, you expect to attract teenagers in record numbers, and have revenues of $10 million a year for the next ten years (your assumed project life). The park will cost $3 million a year to operate, and the depreciation will be $1 million a year. At the end of the ten years, it