A large manufacturing firm (Buyer) wants to diversity horizontally by acquitting a smaller firm in the...

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A large manufacturing firm (Buyer) wants to diversity horizontally by acquitting a smaller firm in the same industry (Target). The Buyer intends to offer shareholders of the Target $16.00 per share for all of their outstanding shares. The Buyer believes that the synergy created by this acquisition will generate an additional $4 million in annual earnings above the current earnings of the two firms. The Cost of Capital (Discount Rate) of the Buyer is 20%. Current information on the market status of the two firms is as follows: Target Buyer Market Price/Share Shares Outstanding $26.00 10 million $15.00 8 million What would be the expected value of the shares of the Buyer and Target companies following this acquisition? Show the calculations you use to derive your answer. A large manufacturing firm (Buyer) wants to diversity horizontally by acquitting a smaller firm in the same industry (Target). The Buyer intends to offer shareholders of the Target $16.00 per share for all of their outstanding shares. The Buyer believes that the synergy created by this acquisition will generate an additional $4 million in annual earnings above the current earnings of the two firms. The Cost of Capital (Discount Rate) of the Buyer is 20%. Current information on the market status of the two firms is as follows: Target Buyer Market Price/Share Shares Outstanding $26.00 10 million $15.00 8 million What would be the expected value of the shares of the Buyer and Target companies following this acquisition? Show the calculations you use to derive your answer.

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Step 12 Incremental annual earnings 4 million Cost of capital 20 Value of Synergy Increment... View the full answer