Question
Ridgetown NewsInc. is considering making an offer to purchase Orford Publications. The vice president of finance has collected the following information: RidgetownOrfordPrice/earnings ratio13.29.2Shares outstanding1,100,000185,000Earnings$3,100,000$605,000Dividends$810,000$260,000 Ridgetown
Ridgetown NewsInc. is considering making an offer to purchase Orford Publications. The vice president of finance has collected the following information:
RidgetownOrfordPrice/earnings ratio13.29.2Shares outstanding1,100,000185,000Earnings$3,100,000$605,000Dividends$810,000$260,000
Ridgetown also knows that securities analysts expect the earnings and dividends of Orford to grow at a constant rate of 5 percent each year. Ridgetown management believes that the acquisition of Orford will provide the firm with some economies of scale that will increase this growth rate to 7% per year.
a.What is the value of Orford to Ridgetown?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Value of report$
b.What would Ridgetown's gain be from this acquisition?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Gain$
c.If Ridgetown were to offer $34 in cash for each share of Orford, what would the NPV of the acquisition be?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
NPV$
d.What's the most Ridgetown should be willing to pay in cash per share for the stock of Orford?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Maximum share price$
e.If Ridgetown were to offer 120,000 of its shares in exchange for the outstanding stock of Orford, what would the NPV be?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
NPV$
f-1.Should the acquisition be attempted?
- Yes
- No
f-2.If so, should it be as in (c) or as in (e)?
Ridgetown should offer
(Click to select)
120,000 shares
$34 in cash
Ridgetown's outside financial consultants think that the 7% growth rate is too optimistic and a 6% rate is more realistic.
g-1.What is the value of Orford to Ridgetown?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Value of report$
g-2.What would Ridgetown's gain be from this acquisition?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Gain$
g-3.If Ridgetown were to offer $34 in cash for each share of Orford, what would the NPV of the acquisition be?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
NPV$
g-4.What's the most Ridgetown should be willing to pay in cash per share for the stock of Orford?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
Maximum share price$
g-5.If Ridgetown were to offer 120,000 of its shares in exchange for the outstanding stock of Orford, what would the NPV be?(Do not round intermediate calculations. Round the final answer to 2 decimal places.Omit $ sign in your response.)
NPV$
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