Claire Inc is considering making an offer to buy Kevin Ltd. Claires Vice President of finance has collected the following information:

Claire Inc knows that securities analysts expect the earnings and dividends of Kevin Ltd to grow at a constant rate of 5% each year. Claires management believes that their more sophisticated marketing expertise and economies of scale would increase Kevin Ltd.s growth rate to 7%.

QUESTIONS:

1. What is the value of Kevin Ltd to Claire Inc?
2. What are the synergies from this transaction?
3. If Claire Inc was to offer $38 cash for each share of Kevin Ltd what would be the NPV of this acquisition?
4. If Claire were to offer 100,000 of its shares in exchange for all the outstanding stock of Kevin Ltd, what would the NPV be?
5. Should Claire Inc proceed to acquire Kevin Ltd? If yes, should it offer cash or the share exchange (elaborate)?

\begin{tabular}{|l|c|c|} \hline & Claire Inc & Kevin Inc \\ \hline PE Ratio & 14.5 & 9.2 \\ \hline Shares outstanding & 1,300,000 & 175,000 \\ \hline Earnings & $3,900,000 & $640,000 \\ \hline Dividends & $950,000 & $310,000 \\ \hline \end{tabular}