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    Merger and Acquisitions

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    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?

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    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

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