Q:Calculating NPV [LO3] BQ, Inc., is considering making an offer to purchase Rep
ID: 2647406 • Letter: Q
Question
Q:Calculating NPV [LO3] BQ, Inc., is considering making an offer to purchase Report Publications. The vice president of finance has collected the following information:
BQ also knows that securities analysts expect the earnings and dividends of Report to grow at a constant rate of 4 percent each year. BQ management believes that the acquisition of Report will provide the firm with some economies of scale that will increase this growth rate to 6 percent per year.
d. What is the value of Report to BQ?
e. What would BQ's gain be from this acquisition?
f. If BQ were to offer $38 in cash for each share of Report, what would the NPV of the acquisition be?
g. What's the most BQ should be willing to pay in cash per share for the stock of Report?
h. If BQ were to offer 200,000 of its shares in exchange for the outstanding stock of Report, what would the NPV be?
i. Should the acquisition be attempted? If so, should it be as in (c) or as in (e)?
j. BQ's outside financial consultants think that the 5 percent growth rate is too optimistic and a 6 percent rate is more realistic. How does this change your previous answers
?
Explanation / Answer
ANSWER: CALCULATION OF VALUE OF REPORT TO BQ:
PRE MERGER
BQ's gain be from this acquisition:
EARNING PRICE PER SHARE (EPS ) AFTER MERGER : TOTAL EARNING/TOTAL NO OF SHARES AFTER MERGER
TOTAL EARNING = ($3900000+$640000)=4540000
TOTAL NO OF SHARES AFTER MERGER = (1300000+175000)=1475000
EPS AFTER MERGER = 4540000/1475000 =3.07796610169
P/E RATIO = 14.5
MPS AFTER MERGER = 3.07796610169*14.5 =44.6305084745
POST MERGER MARKET VALUE
BQ: 1300000*44.6305084745
REPORT : 175000*44.6305084745
If BQ were to offer $38 in cash for each share of Report, what would the NPV of the acquisition be?
BQ OFFERS TO PAY $38 PER SHARE THAN THE SHARE EXCHANGE RATIO IS 38/43.5=0.87356321839. THE TOTAL NO OF SHARES TO BE ISSUED BY BQ TO THE SHAREHOLDERS OF REPORT WOULD BE (175000*0.87356321839)=152873.563218 .
THAN NPV IS = 4540000/(1300000+152873.563218)=3.12484177907
the most BQ should be willing to pay in cash per share for the stock of Report
MAXIMUM EXCHANGE RATIO SO THAT THERE IS NO DILUTION OF MARKET VALUE PER SHARE:
PRE MERGER MARKET CAPITALIZATION :
MPS*NO OF SHARES (43.5*1300000) $56550000
PRE MERGER MARKET CAPITALIZATION OF REPORT:
MPS*NO OF SHARES (33.645688*175000) $5887995.4
COMBINED MARKET CAPITALIZATION $62437995.4
CURRENT MARKET VALUE PER SHARE OF BQ 43.5
MAXIMUM NO OF SHARE OF BQ ($62437995.4/43.5) 1435356.21609
EXISTING NO OF SHARES OF BQ 1300000
MAXIMUM NO OF SHARES TO BE EXCHANGED:
(1435356.21609-1300000) 135356.21609
MAXIMUM SHARE EXCHANGE RATIO (135356.21609/175000) 0.77346409194
BQ were to offer 200,000 of its shares in exchange for the outstanding stock of Report, what would the NPV be:
TOTAL EARNINGS = 4540000
TOTAL NO OF SHARES = (1300000+ 200000)= 1500000
EPS = 4540000/1500000= 3.026666666
YES ACQUISITION SHOULD BE ATTEMPTED BEC NPV IS HIGHER THAN PRE MERGER.
BQ's outside financial consultants think that the 5 percent growth rate is too optimistic and a 6 percent rate is more realistic.
COST OF CAPITAL : (DIVIDEND/PRICE)+GROWTH%
= (.73076923076/43.5)+5% =0.01763925729
AFTER ACQ. GROWTH BECOMES 6%
PRICE PER SHARE AFTER ACQ. = .73076923076/(0.01763925729-0.06) = -17.2510959003
ACC TO 6% COST OF CAP IS:
= (.73076923076/43.5)+6%=0.01780725021
PARTICULAR BQ REPORT EARNINGS (A) $3900,000 $640000 NUMBER OF SHARE (B) 1300,000 175000 EARNING PRICE PER SHARE (EPS ): [C= A/B] 3 3.65714 P/E (D) 14.5 9.2 MARKET PRICE PER SHARE (MPS)(e): (C*D) 43.5 33.645688 MARKET VALUE (NO. OF SHARE * MARKET PRICE PER SHARE) 5655,0000 5887995.4Related Questions
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