Question

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:

Dublin Medical  Arlington

Earnings per share $3.00 $2.00

Dividend per 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.

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