Merger valuation Harrison Corporation is interested in acquiring Van Buren Corpo
ID: 2612426 • Letter: M
Question
Merger valuation
Harrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 3% and the market risk premium is 7%.
Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at $2.75 a share, but synergies will enable the dividend to grow at a constant rate of 9% a year (instead of the current 6%). Harrison also plans to increase the debt ratio of what would be its Van Buren subsidiary - the effect of this would be to raise Van Buren's beta to 1.2. What is the per-share value of Van Buren to Harrison Corporation? Round your answer to the nearest cent.
$ _____
Explanation / Answer
Reurn=Riskfree+ Beta *Market Risk Premium 3%+1.2*7%= 10.4% Price (P0)=Dividend/Ke-g 2.75/(0.104-0.06)=62.5