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

Foxy also knows that securities analysts expect the earnings and dividends (currently $0.88 per share) of Pulitzer to grow at a constant rate of 3 percent each year. Foxy management believes that the acquisition of Pulitzer will provide the firm with some economies of scale that will increase this growth rate to 5 percent per year.

a. What is the value of Pulitzer to Foxy?

b. What would Foxy’s gain be from this acquisition?

c. If Foxy were to offer $15 in cash for each share of Pulitzer, what would the NPV of the acquisition be?

d. What’s the most Foxy should be willing to pay in cash per share for the stock of Pulitzer?

e. If Foxy were to offer 125,000 of its shares in exchange for the outstanding stock of Pulitzer, what would the NPV be?

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

g. Foxy’s outside financial consultants think that the 5 percent growth rate is too optimistic and a 4 percent rate is more realistic. How does this change your previous answers?

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Price-earnings ratio Shares outstanding Earnings Foxy 11.5 1,000,000 $2,000,000 Pulitzer 8 300,000 $480,000