Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vic
ID: 2792966 • Letter: P
Question
Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice president of finance has collected the following information:
Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of 5 percent each year. Plant management believes that the acquisition of Palmer will provide the firm with some economies of scale that will increase this growth rate to 7 percent per year.
What is the value of Palmer to Plant? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What would Plant’s gain be from this acquisition? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
If Plant were to offer $28 in cash for each share of Palmer, what would the NPV of the acquisition be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What is the most Plant should be willing to pay in cash per share for the stock of Palmer? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
If Plant were to offer 233,000 of its shares in exchange for the outstanding stock of Palmer, what would the NPV be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Plant's outside financial consultants think that the 7 percent growth rate is too optimistic and a 6 percent rate is more realistic.
If Plant still offers $28 per share, what is the NPV with this new growth rate? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
If Plant still offers 233,000 shares, what is the NPV with this new growth rate? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice president of finance has collected the following information:
Explanation / Answer
Solution:
a. The price-earning-growth ratio (PEG) = 10.8/0.05 = 216
The value of Palmer to Plant = 216* 0.07 * $1,128,800 =$17,067,456
b. Plant’s gain be from this acquisition = The value of Palmer to Plant - market value of Palmer
= $17,067,456 – (10.8 * $1,128,800 )
= $4,876,416
c. The NPV of the acquisition= The value of Palmer to Plant – The cost of buying Palmer
=$17,067,456 – (830,000*$28)
=- $6,172,544
d. The most Plant should be willing to pay in cash per share for the stock of Palmer = The value of Palmer to Plant/number of shares outstanding of the Palmer
= $17,067,456/830,000
= $20.56
e. NPV = The value of Palmer to Plant - The cost of buying Palmer
The value of the combined firm= Value of Plant + The value of Palmer to Plant
= (15.3*$4,550,400) + $17,067,456
= $25,000,000 + $6,960,000
= $86,688,576
The value per share of the combined firm = The value of the combined firm/number ofshares outstanding of the combined firm = €86,688,576/(1,580,000 + 233,000) = $47.81
The cost of buying Palmer = 233,000 *$47.81 = $11,139,730
NPV = $17,067,456 - $11,139,730 = $5,927,726
f-1. The price-earning-growth ratio (PEG) = 15.3/0.06 = 255
The value of Palmer to Plant = 255* 0.06 * $4,550,400 =$69,621,120
The NPV of the acquisition= The value of Palmer to Plant – The cost of buying Palmer
=$69,621,120 – (1,580,000*$28)
=$25,381,120