Plant Inc. is considering making an offer to purchase Palmer Corp. Plant's VP has collected the following information:
Price-earnings Ratio 14.00 11.0
Shares Outstanding 1,000,000 620,000
Earnings $1,800,000 $580,000
Dividends (total) $600,000 $290,000
Plant also knows that analysts expect the earnings and dividends of Palmer to grow at a constant rate of 5% each year. Plant's management believes that the acquisition of Palmer will provide their firm with some economies of scale that will increase this growth rate further to 7% per year.
Assume that Plant has hired you as an Investment Banker to help them with the following questions.
1. What is the value of Palmer to Plant?
2. What would be Plant's gain from this acquisition
3. If Plant were to offer $17 in cash for each share of Palmer, what would the NPV of the acquisition be?
4. What should be the maximum price per share (in cash) that Plant should be willing to pay for Palmer's shares?
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The maximum an acquirer would pay is depicted.