Question
Company A is considering the acquisition of Company B. B currently derives its sales from the US. A expects to create value by expanding Bs
Company A is considering the acquisition of Company B. B currently derives its sales from the US. A expects to create value by expanding Bs sales to Asia and expects the following improvements: Asian segment will create revenue of $400 one year after the acquisition, and is expected to increase at an annual rate of 4% in perpetuity. The pre - tax operating margin on the increased revenue will be 30%. Pre - tax operating margin = (Revenue-Cash costs/Revenue). It is anticipated that annual cash costs will be reduced by $600, starting one year after the acquisition, and the decrease will be perpetual. There will be no changes in capital expenditure or working capital . The tax rate is 25%, WACC is 9%. Bs pre-acquisition stock price (before any news of acquisition became public) is $75 and it has 200 shares outstanding. What is As breakeven price per share for B?
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