BQ, Inc., is considering making an offer to purchase Report Publications. The vi
ID: 2770154 • Letter: B
Question
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.
What is the value of Report to BQ? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What would BQ’s gain be from this acquisition? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
If BQ were to offer $36 in cash for each share of Report, what would the NPV of the acquisition be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What’s the most BQ should be willing to pay in cash per share for the stock of Report? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
If BQ were to offer 190,000 of its shares in exchange for the outstanding stock of Report, what would the NPV be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
BQ’s outside financial consultants think that the 6 percent growth rate is too optimistic and a 5 percent rate is more realistic.
What is the value of Report to BQ? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What would BQ’s gain be from this acquisition? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
If BQ were to offer $36 in cash for each share of Report, what would the NPV of the acquisition be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What’s the most BQ should be willing to pay in cash per share for the stock of Report? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
If BQ were to offer 190,000 of its shares in exchange for the outstanding stock of Report, what would the NPV be? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Should the acquisition be attempted? If so, should it be as in (c) or as in (e)?
BQ, Inc., is considering making an offer to purchase Report Publications. The vice president of finance has collected the following information:
Explanation / Answer
ANSWER: CALCULATION OF VALUE OF REPORT TO BQ:
PRE MERGER
PARTICULAR
BQ
REPORT
EARNINGS (A)
$4,600,000
$680,000
NUMBER OF SHARE (B)
1,500,000
165,000
EARNING PRICE PER SHARE (EPS ): [C= A/B]
3.067
4.12
P/E (D)
12.20
8.80
MARKET PRICE PER SHARE (MPS)(e): (C*D)
37.42
36.256
MARKET VALUE (NO. OF SHARE * MARKET PRICE PER SHARE)
56,130,000
5,982,240
2)
BQ's gain be from this acquisition:
EARNING PRICE PER SHARE (EPS ) AFTER MERGER : TOTAL EARNING/TOTAL NO OF SHARES AFTER MERGER
TOTAL EARNING = ($4,600,000+$680,000)=5,280,000
TOTAL NO OF SHARES AFTER MERGER = (1,500,000+165,000)=1,665,000
EPS AFTER MERGER = 5,280,000/1665000 =3.17
P/E RATIO = 12.20
MPS AFTER MERGER = 3.17*12.20 =38.69
PARTICULARS
BQ
REPORT
POST MERGER MARKET VALUE
BQ: 1,500,000*38.69
REPORT : 165000*38.69
$58,032,432.4323
6,383,850
PRE MERGER MARKET VALUE
56,130,000
5,982,240
GAIN FROM MERGER(POST - PRE)
$1,902,432.43
$401,610
3)
If BQ were to offer $36 in cash for each share of Report, what would the NPV of the acquisition be?
BQ OFFERS TO PAY $36 PER SHARE THAN THE SHARE EXCHANGE RATIO IS 36/37.42=0.9621 THE TOTAL NO OF SHARES TO BE ISSUED BY BQ TO THE SHAREHOLDERS OF REPORT WOULD BE (165000*0.9621)=158738.64
THAN NPV IS = 5,280,000/(1,500,000+158738.64)=5280,000/1658738.64=3.183
4)
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 (37.42*1500,000) $56,130,000
PRE MERGER MARKET CAPITALIZATION OF REPORT:
MPS*NO OF SHARES (36.256*165000) $5982240
COMBINED MARKET CAPITALIZATION $62,112,240
CURRENT MARKET VALUE PER SHARE OF BQ 37.42
MAXIMUM NO OF SHARE OF BQ ($62112240/37.42) 1,659,867.451
EXISTING NO OF SHARES OF BQ 1,500,000
MAXIMUM NO OF SHARES TO BE EXCHANGED:
(1659867.451-1500000) 159,867.451
MAXIMUM SHARE EXCHANGE RATIO (159867.451/165000) 0.9689
PARTICULAR
BQ
REPORT
EARNINGS (A)
$4,600,000
$680,000
NUMBER OF SHARE (B)
1,500,000
165,000
EARNING PRICE PER SHARE (EPS ): [C= A/B]
3.067
4.12
P/E (D)
12.20
8.80
MARKET PRICE PER SHARE (MPS)(e): (C*D)
37.42
36.256
MARKET VALUE (NO. OF SHARE * MARKET PRICE PER SHARE)
56,130,000
5,982,240
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