Ridgetown NewsInc. is considering making an offer to purchase Orford Publications. The vice president of finance has
Question:
Ridgetown NewsInc. is considering making an offer to purchase Orford Publications. The vice president of finance has collected the following information:
RIDGETOWN ORFORD
PRICE/EARNINGS RATIO 15.2 9.0
SHARES OUTSTANDING 1,100,000 160,000
EARNINGS $4,200,000 $660,000
DIVIDENDS $920,000 $370,000
Ridgetown also knows that securities analysts expect the earnings and dividends of Orford to grow at a constant rate of 4 percent each year. Ridgetown management believes that the acquisition of Orford will provide the firm with some economies of scale that will increase this growth rate to 6% per year.
a.What is the value of Orford to Ridgetown?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Value of report$
b.What would Ridgetown's gain be from this acquisition?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Gain$
c.If Ridgetown were to offer $40 in cash for each share of Orford, what would the NPV of the acquisition be?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
NPV$
d.What's the most Ridgetown should be willing to pay in cash per share for the stock of Orford?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Maximum share price$
e.If Ridgetown were to offer 86,000 of its shares in exchange for the outstanding stock of Orford, what would the NPV be?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
NPV$
f-1.Should the acquisition be attempted?
- Yes
- No
f-2.If so, should it be as in (c) or as in (e)?
Ridgetown should offer
A. 86,000 shares, OR
B. $40 in cash
Ridgetown's outside financial consultants think that the 6% growth rate is too optimistic and a 5% rate is more realistic.
g-1.What is the value of Orford to Ridgetown?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Value of report$
g-2.What would Ridgetown's gain be from this acquisition?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Gain$
g-3.If Ridgetown were to offer $40 in cash for each share of Orford, what would the NPV of the acquisition be?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
NPV$
g-4.What's the most Ridgetown should be willing to pay in cash per share for the stock of Orford?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Maximum share price$
g-5.If Ridgetown were to offer 86,000 of its shares in exchange for the outstanding stock of Orford, what would the NPV be?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
NPV$