3. As treasurer of Products Inc., you are contemplating the acquisition of Playstores Inc. You collect the following data: Earnings per share (EPS) Dividend per share (DPS) Number of shares Stock price Products Inc. $5.00 $3.00 1,000,000 $90 Playstores Inc. $1.50 $0.80 600,000 $20 You estimate that investors currently expect a steady growth of about 6% in Playstores' earnings and dividends. Under new management this growth rate would be increased to 8% per year, without any additional capital investment required (That is the manifestation of the merger synergies). a) Calculate the gain from the merger and PVAB (value of merged firm's operations). First find the required discount rate for Playsotres via the perpetual growth model: Po = re thus Po = E(01) thus _0.8 0 == $20 ==> r = 10% Playstores Inc. value as a stand-alone firm equals: $20*600,000 = $12,000,000 Playstores Inc. value post-merger (that includes the increased growth rate synergies): 600,000 * 0.1-0.08 00g = $24,000,000 600.000 0.8 3. As treasurer of Products Inc., you are contemplating the acquisition of Playstores Inc. You collect the following data: Earnings per share (EPS) Dividend per share (DPS) Number of shares Stock price Products Inc. $5.00 $3.00 1,000,000 $90 Playstores Inc. $1.50 $0.80 600,000 $20 You estimate that investors currently expect a steady growth of about 6% in Playstores' earnings and dividends. Under new management this growth rate would be increased to 8% per year, without any additional capital investment required (That is the manifestation of the merger synergies). a) Calculate the gain from the merger and PVAB (value of merged firm's operations). First find the required discount rate for Playsotres via the perpetual growth model: Po = re thus Po = E(01) thus _0.8 0 == $20 ==> r = 10% Playstores Inc. value as a stand-alone firm equals: $20*600,000 = $12,000,000 Playstores Inc. value post-merger (that includes the increased growth rate synergies): 600,000 * 0.1-0.08 00g = $24,000,000 600.000 0.8