Dunbar Hardware, a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware. Dunbar's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Eastern is 16%. Eastern has 4 million shares outstanding and no debt. Eastern's current price is $16.25. What is the maximum price per share that Dunbar should offer?

Question

Quizplus · Accepted Answer

The maximum price per share Dunbar should offer is calculated by adding the present value of the merger benefits to Eastern's current market capitalization, then dividing by the number of shares. The market cap is 4 million shares * $16.25 = $65 million. Adding the $72.52 million benefits gives $137.52 million. Dividing by 4 million shares gives $34.38 per share. However, this calculation seems incorrect as it exceeds the given options. The correct approach is to calculate the additional value per share from the merger benefits: $72.52 million / 4 million shares = $18.13. Adding this to the current price of $16.25 gives $34.38, but the maximum price Dunbar should offer is the current price plus the additional value per share, which is $18.13.

Dunbar Hardware, a National Hardware Chain, Is Considering Purchasing a Smaller