D Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation, a young firm with a high growth rate of earnings. The acquisitions analysis group at DM has produced the following table of relevant data:
DMedical Arlington
Earnings per share $3.00 $2.00
Dividend pers share $3.00 $ .80
Number of shares 200 million 10 million
Stock price $30 $20
DM's analysts estimate that investors currently expect growth of about 6% per year in Arlington's earnings and dividends. They assume that with the improvements in management that DM could bring to Arlington, its growth rate would be 10% per year beginning one year from now with no additional investment outlays beyond those already expected.
What is the expected gain from the acquisition?
What is the net present value (NPV) of the acquisition to DM shareholders if it costs an average $30 per share to acquire all of the outstanding shares? -
Would it matter to DM's shareholders whether the shares of Arlington stock are acquired by paying cash or DM stock?