Mirandel Inc. is considering the acquisition of Tarantel Corp. Mirandel's earnings after tax are $2 million, it
Question:
Mirandel Inc. is considering the acquisition of Tarantel Corp. Mirandel's earnings after tax are $2 million, it has 2 million shares outstanding, and its price-to-earnings (P/E) ratio is 20. Tarantel's earnings are $1.5 million, it has 0.5 million shares, and its P/E ratio is 15. Mirandel's earnings and dividends are expected to grow at a constant rate of 5 percent per year. With the acquisition of Tarantel, the growth rate is expected to increase to 8 percent.
a. If Mirandel's current dividend per share is $1.50, what is Mirandel's cost of equity capital if its dividend per share grows at a constant rate of 5 percent forever?
b. What is the value of Tarantel for Mirandel's shareholders?
c. What will the net present value of the acquisition be if Mirandel offers $50 in cash for each outstanding share of Tarantel? What if it offers 756,000 of its shares in exchange for all the outstanding shares of Tarantel? Should Mirandel make a cash or share exchange offer?
Net Present ValueWhat is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Step by Step Answer:
Finance for Executives Managing for Value Creation
ISBN: 978-0538751346
4th edition
Authors: Gabriel Hawawini, Claude Viallet