You are a partner of Private Equity Firm, Tiger LLC (Acquiring firm) and you have the following information for the acquisition of the firm, ABC Corp (target firm), which is currently your project.The target firm is a private firm.
·Average P/E ratio of target comparable firms: 21 times and Net income of ABC Corp at t=0 is $7.0 million
·Target comparable firms: leverage ratio 40%,equity beta is 0.85 and debt beta is 0.2
·Risk free rate is 3% and market risk premium is 6%.
·Five year estimation of free cash flow to the firm (FCFF) and interest tax shields
oFCFF: 13 million (t=1), 7.4 million (t=2), -5.8 million (t=3), 1.4 million (t=4), and 10.3 million (t=5)
oInterest tax shields: $2.3 million at t=1, $2.3 million at t=2, $2.3 million at t=3, $2.7 million at t=4, $2.8 million at t=5 assuming that cost of debt is 7% for the target firm
·Estimation of FCFF at t=6 is $11 million (after t=6 and beyond, constant growth rate = 5% and cost of capital = 9%)
Question 1: Determine a suggested offer price at t=0 for the acquisition of ABC using the information of comparable firm.
Question 2: Perform NPV analysis for this project using APV method.