Grandma\'s cookies inc. is considering aquiring mothers baked goods inc.after co

Question

Grandma's cookies inc. is considering aquiring mothers baked goods inc.after consideration of all benefits,synergies and tax effects, grandma (originally a finance Major) has estimated that the incremental cash flows from the acquistion will be about $150,000 per year for 15 years. (grandma is financially conservative and reluctant to base decisions on benefits projected farther into the future.) She has also estimated the projects discount rate, appropriatley adjusted for risk, at 12%. Mother is privately owned firm with 20,000 shares of stock outstanding. grandma is confident that the owners will sell for $50 a share, But not for less. Should grandma acquire mothers?

Explanation / Answer

$150,000 * 15 * 0.88 = $1,980,000 Grandma should not acquire mothers as it will increase her revenue by $1,980,000 but possibly decrease it as well because Mothers currently has at least $2,000,000 of outstanding stock (20,000 * $50) . So if the shareholders decide to sell it would hurt Grandma's profits. Hope this helps, best of luck.

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