Reference no: EM133121746
Acme Co is looking to acquire Value Co at the end of the current year. Acme generates free cash flows of $2,500,000 in next year, which will increase by 5% in perpetuity. Acme's weighted average cost of capital is 10%. Acme's shares trade at $10 per share and there are 5,000,000 shares outstanding. Value Co generates free cash flows of $1,000,000 in perpetuity. Value Co's weighted average cost of capital is 10%. Value Co's shares trade at $5 per share and there are 2,000,000 shares outstanding. Acme believes that after acquiring Value Co, that it could reduce overhead costs and generate free cash flows of $200,000 each year. All cash flows occur at the end of the year.
(a) What is the maximum price (in cash) per share that Acme can offer to Value Co's shareholders before destroying Acme's shareholder wealth? Answer based only on the information provided.
(b) After careful consideration, Acme determines that the reduction in overhead costs is not possible after the acquisition. However, Acme can still acquire Value Co by offering one Acme share for two Value Co shares. If Acme acquires Value Co through this scrip bid, what will be the new EPS and Price-to-Earnings ratio of the combined firm? If the Price-to-Earnings ratio for the combined firm is equal to Acme's Price-to-Earnings ratio, how much do the Acme shareholders gain on a per share basis? Assume that earnings are equal to the free cash flows and answer based only on the information provided.
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