Acquisition Incorporated is interested in acquiring Target Corporation. Assume that the risk-free rate of interest is 3%, and the market risk premium is 5%. Acquisition estimates that if it acquires Target, the year-end dividend will remain at $2.34 a share, but synergies will enable the dividend to grow at a constant rate of 6% a year instead of current 4% per year. Acquisition also plans to increase the debt ratio of the new subsidiary, with the effect of raising Targets beta from .9 to 1.1.

• Give two one-sentence examples of the kinds synergies that could lead to the dividend growth.
• Calculate the current market price for Target.
• Calculate the highest price that Acquisition would be willing to pay for Target.
• Describe in a paragraph why this disparity exists, how the parties might settle on a purchase price, what that price might be, who would benefit, and by how much.