The Boston Tea Company plans to acquire Hi Flavor Soda Co. for $60 per share, a 50 percent premium over current market price. John E. Grey, the CFO of Boston Tea, argues that this valuation can easily be justified, using a price-earnings analysis. “Boston Tea has a price-earnings ratio of 15, and we expect that we will be able to generate long-term earnings for Hi Flavor Soda of $5 per share. This implies that Hi Flavor is worth $75 to us, well above our $60 offer price.” Do you agree with this analysis? What are Grey’s key assumptions?
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