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:
RidgetownOrford
Price-earnings ratio14.59.2
Shares outstanding1,300,000175,000
Earnings$3,900,000$640,000
Dividends$950,000$310,000
Ridgetown also knows that securities analysts expect the earnings and dividends of Orford to grow at a constant rate of 5% 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 7% 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 $38 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.Negative answers should be indicated by a minus sign.)
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 100,000 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. Negative answers should be indicated by a minus sign.)
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
(Click to select)
100,000 shares
$38 in cash
Ridgetown's outside financial consultants think that the 7% growth rate is too optimistic and a 6% 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 $38 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.Negative answers should be indicated by a minus sign.)
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 100,000 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.Negative answers should be indicated by a minus sign.)
NPV$