Merger valuation Harrison Corporation is interested in acquiring Van Buren Corpo
ID: 2749593 • 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 $2.05 a share, but synergies will enable the dividend to grow at a constant rate of 7% 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
Minimum required rate of return = Risk free rate + beta * Market risk premium
= 3% + 1.2 * 7%
= 11.4%
Therefore, Per-share value of Van Buren = $2.05 / (11.4% - 7%)
= $46.59