Company A considers acquiring Company B. The financial data of the two firms are
ID: 2760363 • Letter: C
Question
Company A considers acquiring Company B. The financial data of the two firms are as follows.
Company A
Company B
Earnings per share
US$2.50
US$2.00
No. of outstanding shares
450,000
150,000
P/E ratio
12
10
Current dividend per share
US$1.00
US$0.80
Dividends grow rate (per year)
6%
5%
a) Assume that Company A negotiates a stock-for-stock acquisition on the basis of price per share. If Company A pays the minimum price to Company B, analyses how many shares of Company A common stock are outstanding after the acquisition.
b) Determine the NPV of the acquisition if Company A offers 1 new share of Company A for every 1 share of Company B. Should Company A go ahead with the acquisition?
c) Calculate the NPV of the acquisition if Company A offers $25 cash for each outstanding share of Company B. Should Company A go ahead with the acquisition?
d) Discuss the maximum price in terms of cash for the acquisition to be viable. What is the maximum price in terms of new Company A shares for the acquisition to be viable?
Company A
Company B
Earnings per share
US$2.50
US$2.00
No. of outstanding shares
450,000
150,000
P/E ratio
12
10
Current dividend per share
US$1.00
US$0.80
Dividends grow rate (per year)
6%
5%
Explanation / Answer
minimum price to company B = P/E ratio * eps = 10 * 2 = $20
A company price per share = 2.50 *12= 30
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