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Question - Sophie Corporation (SC) is planning to acquire a slower-growth competitor, which will materially increase SC's sales volume. The company to be acquired has pretax margins that are approximately the same as those of SC. SC plans to issue $300 million in long- term debt to finance the entire cost of the acquisition.

a. Discuss how SC's potential acquisition might decrease its valuation based on a constant-growth dividend discount model. Be sure to comment on each of the three factors in such a model.

b. Discuss two reasons why SC's potential acquisition might increase the P/E multiple investors are willing to pay for SC.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M93129631

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