6. Sourdough Mills has considered acquiring Mrs. Baird’s Bakery as an expansion strategy.

Mrs. Baird’s Bakery generated positive cash flows of $5.3 million last year, and cash flows are expected to increase by 4% per year in the foreseeable future. Mrs.

Baird’s has 1.3 million shares outstanding, and the appropriate discount rate is 11%.

a. If Sourdough assumes this level of cash flow will continue forever, what is the most that it should pay for each share of Mrs. Baird’s Bakery?

b. If Sourdough wants the investment justifiable considering only five years of cash flow, what is the most it should pay for the stock?

c. What if it will consider a 10-year planning period?

d. If Mrs. Baird’s Bakery stock is currently selling for $35 per share, what would you do if you were Sourdough Mills?