Module 7 Essay Example | Topics and Well Written Essays - 750 words - 3

Module 7 - Essay Example The merger is an investment made by Alaska since it acquires another company, Estoya. Therefore, taking Estoya as an asset, the return on investment (ROI) based on the proposed purchase price (1 billion) and the annual cash flows (500million) would be (500,000,000/ 1,000,000,000) = 50% (Braff, 2013). The merger situation involves a required rate of return by the investors and a prospective growth in the future cash flows generated by the targeted company (Estoya Inc.). The information on cash flow, growth rate and the required rate of return is to be used to determine the market value of the targeted firm. Thereafter, it will be simple to decide whether the suggested purchase price of 1 billion new sols is higher or lower than the estimated market value of the targeted firm. The targeted company’s EBIT multiple is determined by dividing the purchase price by the annual cash inflows (1,000,000,000/500,000,000) = 2. The determined multiple (2), is interpreted to mean that Alaska Corporation should pay 2 new sol per 1 new sol of the Estoya’s cash flow. As a result, Alaska corporation should pay a total of (2*500,000,000) = 1,000,000,000 new sol. Since the targeted company’s rate of return is above Alaska’s required rate of return, the merger should be se ttled at 1 billion new sols. That is, Alaska Inc. should pay 1 billion new sols for Estoya Corporation. Based on the estimated value of the targeted company, the maximum price to be paid by Alaska Inc. should be 1 billion new sol (University of Virginia, n.d.). The cash flow generated from the investment is 7 million Yuan annually. The two mentioned country risks, influences the project as follows: the 30% chance that the Chinese government will require the cash flows earned by Kansas Company at the end of one year be reinvested in China for one year before it can be remitted influences the cash flow considered for the