The following information relates to the planned acquisition of a target. Cash flow and synergy figures are after tax. ($M)
$\begin{array}{lr}\text { EstimatedCash Flow for the first } 3 \text { years }&\$50,\$65,\$75\
\text { Estimated amual synergies }&\$15\\text { Planned reinvestment (including synergies) }&40\%\\text { Projected anmual growth rate beyond the third year }&4\%\\text { Return on the market }\left(k_{M}\right)&16\%\\text { The } \left.90 \text { day } \mathrm{T} \text { bill rate ( } \mathrm{k}_{\mathrm{RF}}\right)&8\%\\text {Beta of the acquiring company }&1.25\
\text { Beta of the target company}&1.75\\text { Number of outstanding shares of target }&10 \text { million }\\text { Today's per share selling price of target }&\$16.50
\end{array}$
Calculate the maximum percentage premium that should be offered to the target company's shareholders.

Question

The following information relates to the planned acquisition of a target. Cash flow and synergy figures are after tax. ($M)
 $\begin{array}{lr}\text { EstimatedCash Flow for the first } 3 \text { years }&\$50,\$65,\$75\
\text { Estimated amual synergies }&\$15\\text { Planned reinvestment (including synergies) }&40\%\\text { Projected anmual growth rate beyond the third year }&4\%\\text { Return on the market }\left(k_{M}\right)&16\%\\text { The } \left.90 \text { day } \mathrm{T} \text { bill rate ( } \mathrm{k}_{\mathrm{RF}}\right)&8\%\\text {Beta of the acquiring company }&1.25\
\text { Beta of the target company}&1.75\\text { Number of outstanding shares of target }&10 \text { million }\\text { Today's per share selling price of target }&\$16.50
\end{array}$
 Calculate the maximum percentage premium that should be offered to the target company's shareholders.

Quizplus · Accepted Answer

The Answer of The following information relates to the planned acquisition of a target. Cash flow and synergy figures are after tax. ($M)
 $\begin{array}{lr}\text { EstimatedCash Flow for the first } 3 \text { years }&\$50,\$65,\$75\
\text { Estimated amual synergies }&\$15\\text { Planned reinvestment (including synergies) }&40\%\\text { Projected anmual growth rate beyond the third year }&4\%\\text { Return on the market }\left(k_{M}\right)&16\%\\text { The } \left.90 \text { day } \mathrm{T} \text { bill rate ( } \mathrm{k}_{\mathrm{RF}}\right)&8\%\\text {Beta of the acquiring company }&1.25\
\text { Beta of the target company}&1.75\\text { Number of outstanding shares of target }&10 \text { million }\\text { Today's per share selling price of target }&\$16.50
\end{array}$
 Calculate the maximum percentage premium that should be offered to the target company's shareholders.

The Following Information Relates to the Planned Acquisition of a Target