Use the given information:
Caledonia Minerals ($28Mil Assets) has an estimated beta of 1.6. The company is considering the acquisition of HogWild ($42 Mil assets) that has a beta of 1.2.
Caledonia last paid a dividend of $1 per share 2010. In 2007, the Caledonia paid a dividend of $0.89. This dividend growth rate is expected to be constant for the foreseeable future if the merger is not completed. If the merger is successful, the expected dividend for next year, that is, D1 is expected to be $1.03 and the new long-term growth rate will be 7.5% as a result of the merger.
1.) What is the expected new beta of Caledonia after the acquisition?
2.) The risk-free rate is 7% and the market return is estimated as 12%. What is your estimate of the required return of investors in Caledonia before and after the acquisition?
3.) What is the value of a share of Caledonia prior to the acquisition?
4.) What is the new value of a share of stock in Caledonia, assuming the acquisition is completed?
5.) Would you recommend that Caledonia go ahead with the acquisition? And why?