Lowpoint coffee’s after-tax cash flows are currently $100,000 annually but will grow at 3% indefinitely. With a 15% discount rate how much should Starbucks offer to takeover this mom-and-pop coffee shop assuming a 15% discount rate?
Using the present value of a growing annuity formula:
Internally, Starbuck’s knows this is what Lowpoint is worth. However, upper management would like to offer $750,000 instead. At what interest rate can a $750,000 offer be justified? Just rearrange the PVA formula a bit: