Merger valuation Harrison Corporation is interested in acquiring Van Buren Corpo
ID: 2749898 • Letter: M
Question
Merger valuation
Harrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 4% and the market risk premium is 6%.
Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at $2.30 a share, but synergies will enable the dividend to grow at a constant rate of 9% a year (instead of the current 4%). 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 1.3. What is the per-share value of Van Buren to Harrison Corporation? Round your answer to the nearest cent.
$
Explanation / Answer
Required rate of return = Risk free interest rate + Bete * Market risk premium
= 4 + 1.30 * 6
= 11.8 %
Value per share = 2.30 / 0.118 - 0.09
= 2.30 / 0.028
= $ 82.14 (approx)
Conclusion:- The per-share value of Van Buren to Harrison Corporation = $ 82.14