Although its own operations have shown no growth over the past decade, Hammerworks Inc. has built up a significant cash balance ($2.9 billion) in anticipation of a collapse in equity prices which it believes will create opportunities for valuable acquisitions. Following just such a correction, two potential targets are now being considered: Metallion 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). Goblikon 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 the past several years (it currently has a P/E ratio of 10). In either case, Hammerworks would be expected to pay off the targets bond holders in full as there is a change of control clause in their bond indentures. Since either acquisition would be paid for with cash, the firm expects that either acquisition would increase EPS.

All three firms face a tax rate of 30%, and Hammerworks cost of equity is 8%. Assume there are no synergies from either acquisition but that a 10% premium would have to be paid above the market value of their shares.