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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

MERGER VALUATION Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at $2.00 a share, but synergies will enable the dividend to grow at a constant rate of 7% a year (instead of the current 5%). Harrison also plans to increase the debt ratio of what would be its Van Buren subsidiary; the effect of this would be to raise Van Buren’s beta to 1.1. What is the per-share value of Van Buren to Harrison Corporation?

Summary Introduction

To Determine: The share value of Corporation V to Corporation H.

Introduction: A merger is the mix of two organizations into one by either shutting the old entities into one new entity or by one organization engrossing the other. In other terms, at least two organizations are united into one organization to form a merger.

Explanation

Determine the required return of the stock

RequiredReturn(rs)=[RiskfreeRate(rf)+Beta(β)×MarketRiskPremium(rm)]=[5%+1.10×6%]=[5%+6.60%]=11.60%

Therefore the required return is 11

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