Question 2: Exam 2011: Oak Ltd and Acorn Ltd Oak Ltd is considering making an offer to purchase Acorn Ltd. Oak's CFO has collected the following information: Oak also knows that securities analysts expect the earnings and dividends of Acorn to grow at a constant rate of 4 percent each year. Oak Ltd's management believes that the acquisition of Acorn will provide the firm with some economies of scale that will increase this growth rate to 6 percent per year. Required: a) What is Acorn Ltd's current cost of equity? b) What is the value of Acorn to Oak? c) What would Oak Ltd's gain be from this acquisition? (3 marks) (3 marks) (3 marks) d) If Oak were to offer $12 in cash for each share of Acorn, what would the NPV of the acquisition be? (2 marks) e) What is the most Oak should be willing to pay in cash per share for the stock of Acorn? (2 marks) f) If Oak were to offer 500,000 of its shares in exchange for the outstanding stock of Acorn, what would the NPV of the proposed merger be? (6 marks) g) Should the acquisition be attempted? If so, which way? (1 mark) TOTAL: 20 MARKS