Merger analysis with terminal valuessourdough mills has

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Merger Analysis with Terminal Values

Sourdough Mills has considered acquiring Mrs. Bairds Bakery as an expansion strategy. Mrs. Bairds Bakery generated positive cash flow of $5.3 million last year, and cash flows are expected to increase by 4% per year in the foreseeable future. Mrs. Bairds Bakery has 1.3 million shares outstanding and the appropriate discount rate is 11%.

a. If Sourdough assumes this level of cash flow will continue forever, what is the most that it should pay for each share of Mrs. Bairds Bakery?

b. If Sourdough wants the investment justifiable considering only 5 years of cash flow, what is the most it should pay for the stock?

c. What if it will consider a 10 year planning period?

d. If Mrs. Bairds Bakery stock is currently selling for $35 per share, what would you do if you were Sourdough Mills?

Reference no: EM13381190

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