Bumpstead Inc. is interested in acquiring Blondies Corp. which it has estimated will generate the following cash flows over the next three years ($000) $\begin{array}{lr}1&2&3\\$455&\$275&\$635
\end{array}$
In addition, Bumpstead thinks there will be $25,000 per year in synergies available at no extra cost. Blondies has 50,000 shares outstanding, and its cost of equity is approximately 14%. If Bumpstead is very conservative, and will not look beyond a three year time horizon to justify an acquisition, how much should it pay per share for Blondies stock?

Question

Bumpstead Inc. is interested in acquiring Blondies Corp. which it has estimated will generate the following cash flows over the next three years ($000) $\begin{array}{lr}1&2&3\\$455&\$275&\$635
\end{array}$
 In addition, Bumpstead thinks there will be $25,000 per year in synergies available at no extra cost. Blondies has 50,000 shares outstanding, and its cost of equity is approximately 14%. If Bumpstead is very conservative, and will not look beyond a three year time horizon to justify an acquisition, how much should it pay per share for Blondies stock?

Quizplus · Accepted Answer

The correct answer is A because the present value of the cash flows and synergies over the next three years is $21.95 per share.

Bumpstead Inc 123$455$275$635\begin{array}{lr}1&2&3\\\$455&\$275&\$635\end{array}1$455​2$275​3$635​ In Addition, Bumpstead Thinks There Will Be $25,000 Per Year

Bumpstead Inc $\begin{array}{lr}1&2&3\\\$455&\$275&\$635\end{array}$ In Addition, Bumpstead Thinks There Will Be $25,000 Per Year