Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vic
ID: 2794151 • 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
A. Value of palmer
particulars
Amount
PE Ratio
10.8
Earning
1128800
No. of shares
830000
Earning per share(earning/Number)
1.36
Price Per share (PE*EPS)
14.688
Value Of Palmer (No. of shares*Price Per share
12191040
B. Gain From Acq.
particulars
Amount
Current growth rate
5%
Dividend Per share(478000/830000)
0.575904
Now we can use dividend growth model for finding Ke
Ke= (next dividend/current price) + growth rate
next dividend (.575904*1.05)
0.604699
current price
14.688
Ke= (.604699/14.688)+.005
9.12%
Expected growth rate
7%
Now we can use dividend growth model for finding price
Price=next divident/(Ke-growth)
next dividend (.575904*1.07)
0.616217
Price = (.616217/(.0912-.05)
14.957
Value of total Palmer (no. of shares * price under ne growth
12414310
Gain= New value - old value under part A
223270
C. If cash $28 per share offered
particulars
Amount
A.Total consideration(28*830000)
23240000
B.Value of Palmer under new management
12414310
Loss to Plant (A - B)
10825690
D. Most that plant be willing to pay
particulars
Amount
A. Value of Palmer under new growth rate
12414310
B. No. Of shares
830000
Maximum amount that can be offered A/B
14.957
Thanks
particulars
Amount
PE Ratio
10.8
Earning
1128800
No. of shares
830000
Earning per share(earning/Number)
1.36
Price Per share (PE*EPS)
14.688
Value Of Palmer (No. of shares*Price Per share
12191040