Problem:
Merger Gains and Costs. As treasurer of Leisure Products, Inc., you are investigating the possible acquisition of Plastitoys. You have the following basic data:
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Leisure Products
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Plastitoys
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Forecast earnings per share
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$5
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$1.50
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Forecast 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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$1,000,000
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$600,000
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Stock price
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$90
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$20
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You estimate that investors currently expect a steady growth of about 6 percent in Plastitoys’s earnings and dividends. You believe that Leisure Products could increase Plastitoys’s growth rate to 8 percent per year, without any additional capital investment required.
Q1. What is the gain from the acquisition?
Q2. What is the cost of the acquisition if Leisure Products pays $25 in cash for each share of Plastitoys?
Q3. What is the cost of the acquisition if Leisure Products offers one share of Leisure Products for every three shares of Plastitoys?
Q4. How would the cost of the cash offer and the share offer alter if the expected growth rate of Plastitoys were not increased by the merger?