Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation, a young firm with a high growth rate of earnings. The acquisitions analysis group at DM has produced the following table of relevant data: DM's analysts estimate that investors currently expect growth of about 6% per year in Arlington's earnings and dividends. They assume that with the improvements in management that DM could bring to Arlington, its growth rate would be 10% per year beginning one year from now with no additional investment outlays beyond those already expected.

Dublin Medical Arlington

earnings per share $3.00 $2.00 Dividend per share $3.00 $.80 Number of shares 200 million 10 million Stock price $30 $20

What is the expected gain from the acquisition?

What is the net present value (NPV) of the acquisition to DM shareholders if it costs an average $30 per share to acquire all of the outstanding shares?

Would it matter to DM's shareholders whether the shares of Arlington stock are acquired by paying cash or DM stock?