Plant AG is considering making an offer to purchase Palmer AG. Plant’s vice president of finance has collected the following information:

Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of 5 per cent each year. Plant management believes that the acquisition of Palmer will provide the firm with some economies of scale that will increase this growth rate to 7 per cent per year.

(a) What is the value of Palmer to Plant?

(b) What would Plant’s gain be from this acquisition?

(c) If Plant were to offer €18 in cash for each share of Palmer, what would the NPV of the acquisition be?

(d) What is the most Plant should be willing to pay in cash per share for the equity of Palmer?

(e) If Plant were to offer 100,000 of its shares in exchange for the outstanding equity of Palmer, what would the NPV be?

(f) Should the acquisition be attempted? If so, should it be as in

(c) or as in (e)?
(g) Plant’s outside financial consultants think that the 7 per cent growth rate is too optimistic and a 6 per cent rate is more realistic. How does this change your previous answers?

Transcribed Image Text:

Price-earnings ratio Shares outstanding Earnings Dividends Plant 12.5 1,000,000 2,000,000 600,000 Palmer 9 550,000 580,000 290,000