Sophie Corporation (SC) is planning to acquire a slower-growth competitor, which will materially increase SC's sales volume. The company to be acquired has pretax margins that are approximately the same as those of SC. SC plans to issue $300 million in long- term debt to finance the entire cost of the acquisition.
a. Discuss how SC's potential acquisition might decrease its valuation based on a constant-growth dividend discount model. Be sure to comment on each of the three fac- tors in such a model.
b. Discuss two reasons why SC's potential acquisition might increase the P/E multiple investors are willing to pay for SC.