Share
Explore BrainMass

Merger and Acquisitions

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 %

Use the above information to answer the following questions.

1. Valuation Van Buren currently expects to pay a year-end dividend of $2.00 a share (D1 = $2.00). Van Buren's dividend is expected to grow at a constant rate of 5%a year, and its beta is 0.9. What is the current price of Van Buren's stock?
2. Merger valuation Harrison estimates that if it requires Van Buren, the year-end dividend with remain at $2 a share, but synergies will enable the dividend to grow at a constant rate of 7% a year (instead of the 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 1.1. What is the per-share value of Van Buren to Harrison Corporation?
3. Merger Bid: On the basis of your answers to problem 1 and 2, if Harrison were to acquire Van Buren, what would be the range of possible prices that it could bid for each share of Van Buren common stock?

Solution Preview

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 %

Use the above information to answer the following questions.

1. Valuation Van Buren currently expects to pay a year-end dividend of $2.00 a share (D1 = $2.00). Van Buren's dividend is expected to grow at a constant rate of 5%a year, and its beta is 0.9. What is the current price of Van ...

Solution Summary

The solution explains how to calculate the value of the acquired firm.

$2.19