Question 2 Mergers and Acquisitions Dynamo Ltd is considering making an offer to purchase Stedrup Ltd. Dynamie's CFO has collected the following information: Dynamo Ltd 18 Stedrup Ltd 12 1,000,000 $1,200,000 $600,000 Price-earnings Ratio Shares outstanding After-tax Earnings Dividends 4,000,000 $4,000,000 $800,000 Dynamo also knows that securities analysts expect the earnings and dividends of Stedrup to grow at a constant rate of 3.5 percent each year. Dynamo Ltd's management believes that the acquisition of Stedrup will provide the firm with some economies of scale that will increase this growth rate to 5 percent per year. Required: a) What is Stedrup Ltd's current cost of equity? (3 marks) What is the value of Stedrup to Dynamo? b) (3 marks) What would Dynamo Ltd's gain be from this acquisition? c) (3 marks) d) If Dynamo were to offer $16 in cash for each share ofStedrup, what would the NPV of the acquisition be? (2 marks) e) What is the most Dynamo should be willing to pay in cash per share for the stock of Stedrup? (2 marks) If Dynamo were to offer 750,000 of its shares in exchange for the outstanding stock of Stedrup, what would the NPV of the proposed merger be? (6 marks) E) Should the acquisition be attempted? If so, which way? (1 mark)