Reference no: EM132543291

Ronson Inc., a technology company, is evaluating the possible acquisition of Blake equipment company. If the acquisition is made, it will occur on January 1, 2009. All cash flows shown in the income statements are assumed to occur at the end of the year. Blake currently has a capital structure of 40% debt, but Ronson would increase that to 50% if the acquisition were made.

• Blake, if independent, would pay taxes at 20%, but its income would be taxed at 35%, if it were consolidated. Blake's current market-determined beta is 1.40, and its investment bankers think that its beta would rise to 1.50 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 65% of sales, but it could vary somewhat. Depreciation-generated funds would be used to replace worn-out equipment, so they would not be available to Ronson's shareholders. The risk-free rate is 8%, and the market risk premium is 4%.

Question 1. What is the appropriate discount rate for valuing the acquisition?

Question 2. What is the terminal value?

Question 3. What is the value of Blake to Ronson?

Question 4. Suppose Blake has 120,000 shares outstanding. What is the maximum per share price Ronson should offer for Blake?