BG Corporation is considering a bid to take over SM Limited. Should the takeover occur, BG Corporation would benefit from SM Limited’s before-tax operating cash flows of:
i) $500,000 per year for the first three years,
ii) $700,000 per year from the fourth year into perpetuity, and
iii) $225,000 per year of synergistic savings before taxes in perpetuity starting from the first year.
Assume that the cash flows occur at the end of each year, the tax rate is 40% for both companies, and BG Corporation’s after-tax required rate of return is 13%. What is the maximum amount that BG Corporation should be willing to pay to take over SM Corporation (rounded to the nearest thousand dollars)?