PART I: Problems (25 points)

PROBLEM 1 (12 points: 3 points for each part)

Siena Inc., a large tech company, is considering making an offer to purchase Maive Inc., a smaller network company. Both firms are all equity financed. You have collected the following information on the two companies as of the end of the current year:

Siena Maive

Price-earnings ratio 6 4

Shares outstanding 500,000 220,000

Earnings $2,000,000 $660,000

Maive Inc. currently pays out an annual dividend of one dollar per share. Security analysts expect that, with its current stand-alone operations, Maive's annual dividends per share would grow perpetually at 4% per year. However, Siena's management believes that the acquisition of Maive would open up some new growth opportunities that would result in 6% perpetual annual growth of Maive's dividends per share.

a)What is the post-acquisition value of Maive to Siena?

b)If Siena were to offer $15 cash for each share of Maive, what would be the per-share price of Siena after its acquisition of Maive?

c)What would be the per-share price of Siena if it were to acquire the outstanding stock of Maive with a shares-exchange ratio of 1:4 (i.e. 1 share of Siena for every 4 shares of Maive)?

d)At what shares exchange ratio would shareholders of Maive be indifferent between stock-financed acquisition and cash-financed acquisition?