Question

Merger bid

Harrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 3% and the market risk premium is 7%.

Van Buren currently expects to pay a year-end dividend of $1.80 a share (D₁ = $1.80). Van Buren's dividend is expected to grow at a constant rate of 6% a year, and its beta is 0.9.

Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at $1.80 a share, but synergies will enable the dividend to grow at a constant rate of 10% a year (instead of the current 6%). Harrison also plans to increase the debt ratio of what would be its Van Buren subsidiary-the effect of this would be to raise Van Buren's beta to 1.2.

If Harrison were to acquire Van Buren, what would be the range of possible prices that it could bid for each share of Van Buren common stock?
Round your answers to the nearest cent.
a. Low bound $
b. High bound $

The text gives a number of valid, acceptable reasons for companies to merge. Which of the following is NOT acceptable?

a. Attempts to minimize taxes by acquiring a firm with large accumulated losses that can be used immediately.

b. Acquisition of assets at below replacement value.

c. Using surplus cash to acquire another firm and prevent unfavorable tax consequences for shareholders.

d. Reduction in competition resulting from mergers.

e. Synergistic benefits arising from mergers.

Which of the following statements is most CORRECT?

a. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, research of U.S. firms suggests that in most cases, diversification through mergers does not increase the firm's value.

b. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.

c. The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.

d. Research of U.S. firms suggests that managers' personal motivations have had little, if any, impact on firms' decisions to merge.

e. Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.