We will assume that IBM is analyzing the acquisition of a privately held French company.

The French company is more similar to Low Tech (LT) than any other company whose stock is traded in the public market. To establish a fair market price for the French company, IBM has compiled the statistics presented in the following table. Estimate the market value of the French company (FM) in the following three ways:

(a) the price–earnings ratio, (b)

market value/book value, and

(c) the dividend growth model.

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Variables French company Low Tech Earnings per share $ 2.00 $ 4.00 Dividend per share in year 1 Annual dividend growth rate Price per share Book value per share $ 1.50 $ 2.00 0.04 0.04 ? $40.00 $16.00 $20.00 Cost of equity ? 0.14 Number of shares outstanding 1 million 1.2 million