The target of an acquisition generates cash flows of $8 million per year with a

Question

The target of an acquisition generates cash flows of $8 million per year with a risk level consistent with a return on equity of 16%

a. How much should an acquirer be willing to pay if it won’t consider more than five years of future earnings in setting a price?

b. What is the per-share price if the target has 300,000 shares of common stock outstanding?

c. Assume the acquirer intends to pay for the acquisition with its own stock, which is currently selling for the $36 per share. How many shares must be offered for each share of the target’s stock?

Explanation / Answer

a) Using PV function on a calculator

N = 5, PMT = 8, I/Y = 16%, FV = 0 => Compute PV = $26.19 million

b) Price per share = 26.19 / 0.3 = $87.31

c) No. of shares = 87.31 / 36 = 2.4 shares.

For every share of acquirer, the target has to pay 2.4 of its own shares.

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