Question: Hampshire- Cathway HC a large corporation with no growth in its real earnings is considering acquiring 100 percent of the shares of Trilennium Corporation, a young firm with the high growth rate of earnings. The acquisitions examine group at HC has produced the following table of relevant information.
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Hampshire Cathaway
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Trilennium
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Earnings per share
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$3
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$2
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Dividend per share
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$3
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$0.80
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Number of shares
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200 million
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10 million
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Stock Price
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$30
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$20
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HC's analysts determine that investors expect growth of about 6 percent per year in Tirlenniums earnings & dividends. They suppose that with the improvements in management that HC could bring to Trilennium, its growth rate would be 10 percent per year with no additional investments outlays beyond those already expected.
[A] Determine the expected gain from the acquisitions?
[B] Calculate the net present value of the acquisition to HC shareholders if it costs an average of dollar 30 per share to acquire all of the outstanding shares.
[C] Would it matter to HC's shareholders whether the shares of Trilennium stock are acquired by paying cash or HC stock?