Question

Dunbar Hardware, a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware. Dunbar's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Eastern is 16%. Eastern has 4 million shares outstanding and no debt. Eastern's current price is $16.25. What is the maximum price per share that Dunbar should offer?

Answer 1

Answer:

Duncan can offer up to 18.13 per share.

Explanation:

The merger will generate a present value of $72.52 million

This is the final number, as we are given with the present value of the cash flow.

We can accept a project until their NPV is zero.

NPV = present value of the cashflow - investment

  0   =  72.52 millions                         - investment

investment = 72.52

so it will pay for the shares at most 72.52 million

there are 4 million share outstanding

We will divide the present value of the merger by the shares outstanding to get the price per share:

72,520,000 / 4,000,000 = 18,13‬

Duncan can offer up to 18.13 per share and still achieve their goal of a 16% return