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You work for Netflix and have been asked to evaluate a potential acquisition of a smaller privately. 1 answer below » You work for Netflix and have been asked to evaluate a potential acquisition of a smaller privately owned competitor. The acquisition candidate produces an EBITDA of 10% of Netflix’s EBITDA and is offered to your firm at a price of multiple of 8 times EBITDA. Assume the following: Current debt costs you 8% and you can raise additional debt at this rate today. The loan is to be amortized over 7 years. Current return on equity is 15% Current WACC is 10% Tax rate is 30% (constant) 80% of the purchase price is considered depreciable assets – to be depreciated over ten years on a straight-line View complete question » You work for Netflix and have been asked to evaluate a potential acquisition of a smaller privately owned competitor. The acquisition candidate produces an EBITDA of 10% of Netflix’s EBITDA and is offered to your firm at a price of multiple of 8 times EBITDA. Assume the following: Current debt costs you 8% and you can raise additional debt at this rate today. The loan is to be amortized over 7 years. Current return on equity is 15% Current WACC is 10% Tax rate is 30% (constant) 80% of the purchase price is considered depreciable assets – to be depreciated over ten years on a straight-line basis with no residual values. Residual value for this operation is to be 2x current EBITDA in year ten. Create an after-tax cash flow analysis to answer the following: Economic analysis: is this a fundamentally sound investment? Using the tax cash flows and no debt (pure equity), is the prospect a positive NPV using ROE as the hurdle rate? Using the after tax cash flows and the firm’s WACC, is this project desirable? Explain how you came to this conclusion. View less » Dec 23 2015 10:48 AM
