As financial manager of firm A, you are investigating a possible acquisition of firm B. You have the basic data given in the following table. You estimate that investors expect a steady growth of about 6% in Bs earnings and dividends. Under new management, this constant growth rate would be increased to 8% per year without the need for additional capital.

	A	B
Forecast earnings per share	$5.00	$1.50
Forecast dividend per share	$3.00	$0.80
Number of shares	1,000,000	600,000
Stock price	$90	$20

1. What is the implied discount rate for firm B based on its current stock price, forecast dividend per share, and forecast growth rate? [3 Marks]

2. What is the gain from the acquisition? [6 Marks]

3. What is the cost of the acquisition if A pays $25 in cash for each share of B? What is the cost of the acquisition if A offers one share of A for every three shares of B? [8 Marks]

4. How would the cost of the cash offer change if the expected growth rate of B was not changed by the merger? How would the cost of the share offer change if the expected growth rate of B was not changed by the merger? [8 marks]