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As the manager of Company A, you are investigating the possible acquisition of Company B. You have the following basic data:
Company A
Company B
Earnings per share
$6.00
$2.50
Dividend per share
$3.00
$0.80
Number of shares
1,000,000
600,000
Stock price
$90
$20
You estimate that investors currently expect a steady growth of about 7% in Company B's earnings and dividends. Under new management this growth rate would be increased to 8% per year, without any additional capital investment required.
Required:
(a) What is the gain from the acquisition?
(b) What is the cost of the acquisition if Company A pays $25 per share of Company B?
(c) What is the cost of the acquisition if Company A offers one share for every three shares of Company B?
(d) How would the cost of the cash offer and the share offer alter if the expected growth rate of Company B were not changed by the merger?
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