Question

BQ, Inc., is considering making an offer to purchase iReport Publications. The vice president of finance has collected the following information:

	BQ			iReport
Price–earnings ratio		13.5			9.5
Shares outstanding		1,300,000			195,000
Earnings	$	3,300,000		$	615,000
Dividends	$	830,000		$	280,000

BQ also knows that securities analysts expect the earnings and dividends of iReport to grow at a constant rate of 5 percent each year. BQ management believes that the acquisition of iReport will provide the firm with some economies of scale that will increase this growth rate to 7 percent per year.

a.	What is the value of iReport to BQ? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Value of iReport

$

b.	What would BQ’s gain be from this acquisition? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Gain

$

c.	If BQ were to offer $35 in cash for each share of iReport, what would the NPV of the acquisition be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

d.	What’s the most BQ should be willing to pay in cash per share for the stock of iReport? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maximum share price

$

e.	If BQ were to offer 240,000 of its shares in exchange for the outstanding stock of iReport, what would the NPV be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

BQ’s outside financial consultants think that the 7 percent growth rate is too optimistic and a 6 percent rate is more realistic.

f-1	What is the value of iReport to BQ now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Value of iReport

$

f-2	What would BQ’s gain be from this acquisition? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Gain

$

f-3	If BQ were to offer $35 in cash for each share of iReport, what would the NPV of the acquisition be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

f-4	What’s the most BQ should be willing to pay in cash per share for the stock of iReport? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maximum share price

$

f-5	If BQ were to offer 240,000 of its shares in exchange for the outstanding stock of iReport, what would the NPV be? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

References

eBook & Resources

Worksheet

Answer 1