Problem 3&4 – Company A is considering acquiring Company
Problem 3
Company A is considering acquiring Company B for $1,000,000 in cash. Based on market analysis, a targeted cost of capital for Company B is 12%. Company A has estimated that Company B can generate $ 90,000 of free cash flows over the next 12 years. Should Company A acquire Company B? Please defend your answer using Net Present Value analysis.
Problem 4
A website company generates revenues by selling annual subscriptions to its online service for $1,000/year, paid in full upon subscribing. It sells 10 subscriptions on January 1, 2012 and 10 subscriptions on July 1, 2012.
1. What is the company’s revenue for 2012?
2. Assuming no other transactions, what do the company’s Income Statement and Balance Sheet look like at end of 2012?
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