Although its own operations have not shown growth over the past 10 years, SparkLine Corp. has built up a healthy cash balance ($2.9 billion) in anticipation of a collapse in equity prices which the firm believes will create opportunities for potential acquisitions. Following just such a correction, two potential targets are now being considered: WeaterLine has a current market capitalization of $1.1 billion, $550 million in 6% debt, YTM also 6%, and generates EBIT of $175 million annually with no growth (a 7.1% profit margin on annual sales of $1.4 billion). RockWell has an enterprise value of $1.3 billion, a market valued D/E of 1.1, and has been growing its profits at 4% for several years - it currently has a P/E ratio of 10. In either case, Sparkline Corp would be expected to pay off the targets bond holders in full as there is a change of control clause in their bond agreements. Since either acquisition would be paid for in cash, the firm expects that either acquisition would increase EPS.

All three firms face a tax rate of 30%, and SparkLine Corps cost of equity is 8%. A 10% premium would have to be paid above the market value of their shares. Answer the follow relevant questions:

1) Which of the two targets would provide the largest increase in EPS?

2) If the two targets are currently fairly valued in an efficient market, which of the two transactions would have the greatest impact on SparkLine Corps enterprise value? Explain.

3) In the absence of synergies, could either transaction be profitable for SparkLine Corp? Why or why not