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?

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