QP15 15. Caleulating NPV Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant's vice president of finance has collected the following information: Plant Palmer Price earnings ratio 14.5 10 Shares outstanding 1,500.000 750,000 Earnings $4.200,000 $960,000 Dividends 1.050,000 470,000 Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of 4 percent each year. Plant management believes that the acquisition of Palmer will provide the firm with some economies of scale that will increase this growth rate to 6 percent per year. a. What is the value of Palmer to Plant? b. What would Plant's gain be from this acquisition? e. If Plant were to offer $20 in cash for each share of Palmer, what would the NPV of the acquisition be?
QP15 15. Caleulating NPV Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant's vice president of finance has collected the following information: Plant Palmer Price earnings ratio 14.5 10 Shares outstanding 1,500.000 750,000 Earnings $4.200,000 $960,000 Dividends 1.050,000 470,000 Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of 4 percent each year. Plant management believes that the acquisition of Palmer will provide the firm with some economies of scale that will increase this growth rate to 6 percent per year. a. What is the value of Palmer to Plant? b. What would Plant's gain be from this acquisition? e. If Plant were to offer $20 in cash for each share of Palmer, what would the NPV of the acquisition be?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:QP15
15. Caleulating NPV Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant's vice president of
finance has collected the following information:
Plant
Palmer
Price earnings ratio
14.5
10
Shares outstanding
1,500,000
750,000
Earnings
$4.200,000 $960,000
Dividends
1,050,000
470,000
Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of
4 percent each year. Plant management believes that the acquisition of Palmer will provide the firm with some
economies of scale that will increase this growth rate to 6 percent per year.
a. What is the value of Palmer to Plant?
b. What would Plant's gain be from this acquisition?
c. If Plant were to offer $20 in cash for each share of Palmer, what would the NPV of the acquisition be?
d. What is the most Plant should be willing to pay in cash per share for the stock of Palmer?
e. Ir Plant were to offer 225.000 of its shares in exchange for the outstanding stock of Palmer, what would the
NPV be?
1. Should the acquisition be attempted? If so, should it be as in (c) or as in (e)?
g. Plant's outside financial consultants think that the 6 percent growth rate is too optimistic and a 5 percent rate
is more realistic. How does this change your previous answers?
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