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Merger Valuation of Stock & Beta

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21-1

VALUATION Van Buren currently expects to pay a year-end dividend of $2.00 a share (D1 ¼ $2.00). Van Buren's dividend is expected to grow at a constant rate of 5% a year, and its beta is 0.9. The risk-free rate is 5.6% and the market risk premium is 6%. What is the current price of Van Buren's stock?

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MERGER VALUATION Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at $2.00 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?

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The solution computes Merger Valuation of Stock

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Beta measures a stock's volatility; that is the degree to which its price fluctuates in relation to the overall market. Say a company has a beta of 2. This means that it is two times as volatile as the overall market. Let's say we expect the market to ...

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