Case study

Mr. E. Moretti, the owner of Moretti Corporation (MC) is planning to acquire Torino Airplane Manufacturing Company (TAMC), a company that produces small single-engine airplane. Mr. Moretti asks one of his executives, Mr. R. Belotti, to determine the maximum price that MC should pay to acquire TAMC.

After two weeks of research, Mr. Belotti estimates annual sales of 10 airplanes for TAMC, which results in cash flow per unit of airplane of $1,367,200 to start. In addition, Mr. Belotti is confident that this cash flow can be raised at a rate of 3.20% per year over the next 15 years without affecting the annual sales. Mr. Belotti also concludes that if MC keeps TAMC for 15 years, the Company can sell it to another airplane producer for $110,000,000 at the end of year 15.

Mr. Belotti suggests financing the acquisition totally by selling a series of bonds with after tax and flotation cost of 8% (this is net yield to maturity).

Based on information above, how much- at maximum- do you think MC should pay to acquire TAMC? Defend your position.