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

$

Answer 1

	Value with synergic gain	Value without synergic gain
PE ratio	9.5	9.5
Cost of equity	1/9.5	1/9.5
Cost of equity	10.53%	10.53%
Growth rate	7%	5%
Dividend	280000	280000
Value=	Dividends*(1+G)/(Ke-G)	Dividends*(1+G)/(Ke-G)
Value=	280000*(1+7%)/(10.53%-7%)	280000*(1+5%)/(10.53%-5%)
Value=	8,496,119.40	5,320,000.00
BQ's gain	3,176,119.40	(Synergic Gain)
Offer made per share	35.00
Total share	195,000.00
Total offer	6,825,000.00
value received	8,496,119.40
NPV	1,671,119.40
Most BQ can offer whatever they are getting
Value	8,496,119.40
Total share	195,000.00
per share value	43.57
BQ's own dynamics
PE ratio	13.5
Earnings	3,300,000.00
Shares outstanding	1,300,000.00
EPS	2.54
Price	34.27
Shares offered	240,000.00
Total value offered	8224615.385
Value received	8,496,119.40
NPV	271,504.02