Question

1.     Dublin 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:

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.

           Answer:

2.     What is the expected gain from the acquisition?

Answer:

3.     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?

Answer:

4.     Would it matter to DM’s shareholders whether the shares of Arlington stock are acquired by paying cash or DM stock?

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