Company X data: Value of Company X, stand-alone = $180 million

Company X is publicly traded and is trading at its stand-alone value

Company X is an all-equity firm and has 10 million shares outstanding

Company Y data; Value of Company Y, stand-alone = $24 million

Company Y is publicly traded and is trading at $30 per share

Company Y is an all-equity firm and has 1 million shares outstanding

On a stand-alone basis, Company Y’s expected dividend next year is $1.20 per share and is expected to grow at 5% per year, forever.

Synergies between Company X and Company Y Assume that the ONLY anticipated synergies will come from Company X’s management improving Company Y’s anticipated dividend growth from 5% per year to 7% per year, forever.

Transaction: Company X offers to buy Company Y for $34 million in cash. a. Calculate, per Brealey, Myers and Allen parlance, the GAIN from the acquisition. (In my terminology, calculate the value of synergies from the acquisition). (Hint: there is a trick here, you have the dividend per share next year and the growth rate in perpetuity, but you don’t know the discount rate, i.e., the cost of equity for Company Y’s dividends. You have to back into this estimate using the stand alone value of the firm.)

b. Calculate, per Brealey, Myers and Allen parlance, the COST of the acquisition. In my terminology, this is the PREMIUM PAID by Company X for COMPANY Y, relative to its stand-alone value.

c. What is the Net Present Value of the Acquisition to Company X?