Calculating NPV Plant, Inc., is considering making an offer to purchase Palmer Corp.

Plant’s vice president of fi nance has collected the following information:

Plant Palmer Price–earnings ratio 12.5 9 Shares outstanding 1,000,000 550,000 Earnings $2,000,000 $580,000 Dividends 600,000 290,000 Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of 5 percent each year. Plant management believes that the acquisition of Palmer will provide the fi rm with some economies of scale that will increase this growth rate to 7 percent per year.

a. What is the value of Palmer to Plant?

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

c. If Plant were to offer $18 in cash for each share of Palmer, what would the NPV of the acquisition be?

d. What is the most Plant should be willing to pay in cash per share for the stock of Palmer?

e. If Plant were to offer 100,000 of its shares in exchange for the outstanding stock of Palmer, what would the NPV be?

f. Should the acquisition be attempted? If so, should it be as in

(c) or as in (e)?

g. Plant’s outside fi nancial 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? LO.1