BQ, Inc., is considering making an offer to purchase iReport Publications. The vice president of finance has collected the following information:

BQ iReport

Price-earnings ratio..............................14.5..................9.2

Shares outstanding........................1,400,000............195,000

Earnings....................................$4,300,000..........$705,000

Dividends..................................1,075,000.............375,000

BQ also knows that securities analysts expect the earnings and dividends of iReport to grow at a constant rate of 5 percent each year. BQ management believes that the acquisition of iReport will provide the firm with some economies of scale that will increase this growth rate to 7 percent per year.

a. What is the value of iReport to BQ?

b. What would BQ's gain be from this acquisition?

c. If BQ were to offer $38 in cash for each share of iReport, what would the NPV of the acquisition be?

d. What's the most BQ should be willing to pay in cash per share for the stock of iReport?

e. If BQ were to offer 205,000 of its shares in exchange for the outstanding stock of iReport, what would the NPV be?

f. Should the acquisition be attempted? If so, should it be as in (c) or as in (e)?

g. BQ's outside financial consultants think that the 7 percent growth rate is too optimistic and a 6 percent rate is more realistic. How does this change your previous answers?