Determine net present value of the acquisition

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Reference no: EM135016

Task1. Dublin Medical (DM), a big established corporation with no growth in its real earnings, is considering getting 100% of the shares of Arlington Corporation, a young firm with the high growth rate of earnings. The acquisitions analysis group at DM has produced the subsequent table of relevant data:

Dublin Medical Arlington

Earnings per share $3.00 $2.00

Dividend per share $3.00 $.80

Number of shares 200 million 10 million

Stock price $30 $20

Task2. DM's analysts evaluates that investors currently anticipate growth of about 6% per year in Arlington's earnings and dividends. They assume that with the improvements in management that DM could bring to Arlington its growth rate would be 10 percent per year beginning one year from now with no additional investment outlays beyond those already expected.

Question1. Evaluate the expected gain from the acquisition?

Question2. Determine net present value (NPV) of the acquisition to DM shareholders when it costs an average $30 per share to acquire all of the outstanding shares?

Question3. Would it matter to DM's shareholders whether the shares of Arlington stock are acquired by paying cash or DM stock?

Reference no: EM135016


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