Acme Co is considering an acquisition of Pinder Co at the end of the current year. Acme expects to generate $5 million in cash flows next year, after which the cash flows will grow by 2% per year in perpetuity. Pinder expects to generate $2 million in cash flows next year, after which the cash flows will grow by 3% per year in perpetuity. After the acquisition, Acme expects to be able increase its cash flows by $300,000 per year in perpetuity. This increase in cash flows is attributable to the assets owned by Pinder. Acme’s beta is 1.2 and has 4,000,000 shares outstanding. Pinder’s beta is 0.8 and has 2,000,000 shares outstanding. The risk-free rate is 2% and the market risk premium is 8%. Both Acme and Pinder have no debt. The share prices for Acme and Pinder are equal to the discounted present value of future cash flows. All cash flows occur at the end of the year.

(a) If Acme pays $20 per share acquire Pinder, what is the value of the net benefit to Acme shareholders from the acquisition? Answer based only on the information provided.

(b) If Acme offers a Scrip bid for Pinder, how many shares in Acme would need to be offered for each share in Pinder so that 50% of the gain goes to Acme shareholders and 50% of the gain goes to Pinder shareholders? Answer based only on the information provided.

Answer rating: 100% (QA)

EXPLANATION a The value of the net benefit to Acme shareholders ... View the full answer