Thompson Metals, Inc. is in negotiations to acquire the Hanson Sheet Metal Co. H
ID: 2672163 • Letter: T
Question
Thompson Metals, Inc. is in negotiations to acquire the Hanson Sheet Metal Co. Hanson'e after-tax earnings have averaged $19 million per year for the last 4 years without much variation around that average figure. So far, discussions have been about the business fit of the two firms and pricing has been conspicuously ignored. Thompson'd CEO feels the venture is risky and needs to pay a price that would yield his firm a return of about 20% if no operating improvements cam out of the merger.a. What offering price should be put on the table to open negotiations?
b. Hanson's management is sure to want a higher price. Would that imply capitalizing earning at a higher or lower rate? Why?
c. What arguments in Hanson likely to use?
Explanation / Answer
Thompson Metals, Inc. is in negotiations to acquire the Hanson Sheet Metal Co. Hanson'e after-tax earnings have averaged $19 million per year for the last 4 years without much variation around that average figure. So far, discussions have been about the business fit of the two firms and pricing has been conspicuously ignored. Thompson'd CEO feels the venture is risky and needs to pay a price that would yield his firm a return of about 20% if no operating improvements cam out of the merger.
a. What offering price should be put on the table to open negotiations?
EARNINGS/ RATE OF RETUREN=19 MILLION /.20= $ 95 MILLION
b. Hanson's management is sure to want a higher price. Would that imply capitalizing earning at a higher or lower rate? Why?
1. Paying a higher price would imply a lower percentage return because he would be paying more for the same earnings stream.
2.by Mathematically equation , a lower denominator in the equation above implies a higher price.
c. What arguments in Hanson likely to use?
1. the acquisition is not very risky because the firm is stable and has a solid ongoing business.
2.He also may argue that there’s a good deal of growth potential which would increase the earnings stream into the future above the value of a perpetuity.
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