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		13.8			9.8
Shares outstanding		1,500,000			205,000
Earnings	$	3,500,000		$	625,000
Dividends	$	850,000		$	300,000

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 $32 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 260,000 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 $32 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 260,000 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

$

Answer 1

a. What is the value of iReport to BQ?

Answer : 10,213,636.36

Calculation:

First we need to calculate the EPS

EPS = 625,000 / 205,000 = 3.05 per share

The price per share will be: 9.8 * 3.05 = 29.88

Then we need to calculate the dividends per share:

dividends per share = 300,000 / 205,000 = 1.46

So the required return = =1.46 * (1+5%) / 29.88 + 5% = 0.1014

Then the price per share will be

= (1.46 * (1+7% )) / (0.1014 - 7%) = 49.82

value of iReport = 205,000 * 49.82 = 10,213,636.36

b. What would BQ’s gain be from this acquisition?

Answer: 4,088,636.36

Calculation:

Gain = value of iReport - (Shares outstanding * Price per share)

Value of report is calculated in (a)

Shares outstanding = 205,000

The price per share will be: 9.08 * 3.05 = 29.88

Hence the Gain will be = 10,213,636.36 - (205,000 * 29.88) = 4,088,636.36

c. If BQ were to offer $32 in cash for each share of iReport, what would the NPV of the acquisition be?

Answer: 3,653,636.36

Calculation:

NPV = value of iReport - Cash paid

Value of report is calculated in (a)

Shares outstanding = 205,000

Cash offered for each share = 32

Then the NPV =

=$10,213,636.36 - ($32 * 205,000) = 3,653,636.36

The NPV of the acquisition will be 3,653,636.36

d. What’s the most BQ should be willing to pay in cash per share for the stock of iReport?

Answer: 49.82

Calculation:

Price = Cash paid per share +(NPV / Shares outstanding)

Cash paid per share= 32

NPV of acquisition is calculated in (d)

Shares outstanding = 205,000

Price = 32 + ( 3,653,636.36 / 205,000 = 49.82

e. If BQ were to offer 260,000 of its shares in exchange for the outstanding stock of iReport, what would the NPV be?

Answer: 5,350,065.30

Calculation:

NPV = The value of iReport to BQ - The cost of buying iReport

The value of the combined firm = Value of BQ + The value of iReport to BQ =

The value per share of the combined firm = The value of the combined firm/number of shares outstanding of the combined firm = 22,709,000 + 10,213,636.36 / (1,500,000 + 260,000 ) = $ 18.71

The cost of buying iReport = 260,000 *$ 18.71 = $4,863,571.28

NPV = $ 10,213,636.36 - $ 4,863,571.28 = $ 5,350,065.30

So the NPV, If BQ were to offer 260,000 of its shares in exchange for the outstanding stock of iReport is 5,350,065.30

f. 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?

Answer : 7,675,862.07

Calculation:

First we need to calculate the EPS

EPS = 625,000 / 205,000 = 3.05 per share

The price per share will be: 9.8 * 3.05 = 29.88

Then we need to calculate the dividends per share:

dividends per share = 300,000 / 205,000 = 1.46

So the required return = =1.46 * (1+5%) / 29.88 + 5% = 0.1014

Then the price per share will be if the percentage changed to 6% from 7%:

= (1.46 * (1+6% )) / (0.1014 - 6%) = 37.44

value of iReport = 205,000 * 49.82 = 7,675,862.07

f-2 . What would BQ’s gain be from this acquisition?

Answer: 1,550,862.07

Calculation:

Gain = value of iReport - (Shares outstanding * Price per share)

Value of report is calculated in (f-1)

Shares outstanding = 205,000

The price per share will be: 9.08 * 3.05 = 29.88

Hence the Gain will be = 7,675,862.07 - (205,000 * 29.88) = 1,550,862.07

f-3 . If BQ were to offer $32 in cash for each share of iReport, what would the NPV of the acquisition be?

Answer: 1,115,862.07

Calculation:

NPV = value of iReport - Cash paid

Value of report is calculated in (f-1)

Shares outstanding = 205,000

Cash offered for each share = 32

Then the NPV is calculated as below

NPV =$7,675,862.07 - ($32 * 205,000) = 1,115,862.07

The NPV of the acquisition is 1,115,862.07

f-4. What’s the most BQ should be willing to pay in cash per share for the stock of iReport?

Answer: 37.44

Calculation:

Price = Cash paid per share +(NPV / Shares outstanding)

Cash paid per share= 32

NPV of acquisition is calculated in (f-4)

Shares outstanding = 205,000

Price = 32 + ( 1,115,862.07/ 205,000 = 37.44

f-5. If BQ were to offer 260,000 of its shares in exchange for the outstanding stock of iReport, what would the NPV be?

Answer: 3,187,189.26

Calculation:

NPV = The value of iReport to BQ - The cost of buying iReport

The value of the combined firm = Value of BQ + The value of iReport to BQ =

The value per share of the combined firm = The value of the combined firm/number of shares outstanding of the combined firm = 22,709,000 + 7,675,862.07 / (1,500,000 + 260,000 ) = $ 17.26

The cost of buying iReport = 260,000 *$ 17.26 = $4,488,672.81

NPV = $ 7,675,862.07 - $ 4,863,571.28 = $ 3,187,189.26

So the NPV, If BQ were to offer 260,000 of its shares in exchange for the outstanding stock of iReport is 3,187,189.26