The Johnson Machine Tool Company is thinking of acquiring Lansing Gear Works Inc. Lansing is a stable company that produces cash flows of $525,000 per year. That figure isn’t expected to change in the near future, and no synergies are expected from the acquisition. Johnson’s management has estimated that the appropriate risk-adjusted discount rate for pricing calculations is 15%. Lansing has 200,000 shares of common stock outstanding.

a. What is the most Johnson should be willing to pay for Lansing if management is financially conservative and insists that an acquisition must justify itself within 10 years? State the price in total and per share.

b. How much should Johnson be willing to pay, in total and per share, if management takes a more aggressive position and will consider Lansing’s income as continuing forever?

c. What total and per-share prices are implied if Johnson’s executives are financially very aggressive and assume that their management will transform Lansing into a better company that will grow at 3% per year indefinitely?

d. Comment briefly on the differences in your answers to parts (a), (b), and (c).