Merger Valuation Harrison Corporation is interested in acquiring Van Buren Corpo

Question

Merger Valuation Harrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 5%, and the market risk premium is 6%. Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at $1.64 a share, but synergies will enable the dividend to grow at a constant rate of 7% a year (instead of current 5%). 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 1.15. What is the per-share value of Van Buren to Harrison Corporation? Do not round intermediate calculations.

Explanation / Answer

Aas per CAPM , Cost of Equity is = Risk Free+ Beta*Maket Premeium

5+1.15*6=11.9%

Now Dividend =1.15

Therefore Value of Firm = (1.64*1.07)/.119= 14.746

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