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As the finance manager of Al Hasan International, you are investigating the acquisition of Starlight Company. The following facts are given.
Al Hasan Starlight
Earning per share Rs.6.75 Rs.2.5
Dividend per share Rs.3.25 Rs.1.00
Price per share Rs.48 Rs.15
Number of shares 60,00,000 20,00,000
Investors currently expect the dividends and earnings of Starlight to grow a steady rate of 7%. After acquisition this growth rate would increase to 8% without any additional investment.
Required:
Problem a. What is the benefit of this acquisition?
Problem b. What is the cost of this acquisition to Al Hasan if it pays (i) Rs.17 per share compensation (cash) to Starlight and (ii) offers one share for every 3 shares of Starlight?
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