Plant Inc. is considering making an offer to purchase Palmer Corp. Plant’s VP ha
ID: 2750432 • Letter: P
Question
Plant Inc. is considering making an offer to purchase Palmer Corp. Plant’s VP has collected the following information:
Plant
Palmer
Price-earnings Ratio
14.00
11.0
Shares Outstanding
1,000,000
620,000
Earnings
$1,800,000
$580,000
Dividends (total)
$600,000
$290,000
Plant also knows that analysts expect the earnings and dividends of palmer to grow at a constant rate of 5% each year. Plant’s management believes that the acquisition of Palmer will provide their firm with some economies of scale that will increase this growth rate further to 7% per year.
Assume that Plant has hired you as an Investment Banker to help them with the following questions.
1. What is the value of Palmer to Plant?
2. What would be Plant’s gain from this acquisition?
Plant
Palmer
Price-earnings Ratio
14.00
11.0
Shares Outstanding
1,000,000
620,000
Earnings
$1,800,000
$580,000
Dividends (total)
$600,000
$290,000
Explanation / Answer
Solution - Lets first find the Value of Palmer and Plant - Value is the market value of equity - Below is the calculation to find it
To see if the acquisition is beneficial or not we will calculate the new EPS and if the new EPS is higher than the Purchaser then the acquisition is beneficial otherwise not
We will need to find the exchange ratio Buyer to seller
Exchange ratio = Buyers P/E Ratio / Sellers P/E Ratio
Exchange ratio = 14/11
Exchange ratio = 1.2727
Thus the new EPS 1.90 is higher so this aquisition is beneficial
Plant Palmer a Price-earnings Ratio 14 11 b Shares Outstanding 10,00,000 6,20,000 c Earnings 18,00,000 5,80,000 d Dividends (total) 6,00,000 2,90,000 e EPS ( c/b) 1.80 0.935483871 f Price Per share ( a x e ) 25.2 10.29032258 g Market Value of Equity ( f x b ) 25200000 6380000