As financial manager of Britwell Inc., you are investigating a possible acquisition of Salome. You have the basic data given in the following table. You estimate that investors expect a steady growth of about 6% in Salome’s earnings and dividends. Under new management, this growth rate would be increased to 8% per year without the need for additional capital. Britwell Salome Forecast earnings per share $5.00 $1.50 Forecast dividend per share $3.00 $0.80 Number of shares 1,000,000 600,000 Stock price $90 $20 a. What is the gain from the acquisition? b. What is the cost of the acquisition if Britwell pays $25 in cash for each share of Salome? c. What is the cost of the acquisition if Britwell offers one share of Britwell for every three shares of Salome? d. How would the cost of the cash offer change if the expected growth rate of Salome was not changed by the merger? e. How would the cost of the share offer change if the expected growth rate was not changed by the merger?
As
| Britwell | Salome | |
| $5.00 | $1.50 | |
| Forecast dividend per share | $3.00 | $0.80 |
| Number of shares | 1,000,000 | 600,000 |
| Stock price | $90 | $20 |
a. What is the gain from the acquisition?
b. What is the cost of the acquisition if Britwell pays $25 in cash for each share of Salome?
c. What is the cost of the acquisition if Britwell offers one share of Britwell for every three shares of Salome?
d. How would the cost of the cash offer change if the expected growth rate of Salome was not changed by the merger?
e. How would the cost of the share offer change if the expected growth rate was not changed by the merger?
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