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?
A)$16.25
B)$16.97
C)$17.42
D)$18.13

Question

Quizplus · Accepted Answer

The maximum price per share Dunbar should offer is calculated by adding the present value of the merger benefits ($72.52 million) to Eastern's current market capitalization (4 million shares * $16.25), then dividing by the number of shares. This results in a maximum price of $18.13 per share.

Dunbar Hardware,a National Hardware Chain,is Considering Purchasing a Smaller Chain,Eastern