As treasurer of Holiday Ltd you are investigating the possible acquisition of Leisure Ltd. You have the following basic data:
Holiday
Leisure
Earnings per share (expected next year) £5
Dividends per share (expected next year) £3
£1.50
£0.80
Number of shares 1 million 0.6 million
Share price
£90
£20
You estimate that investors currently expect a steady growth of about 6 per cent in Leisure’s earnings and dividends. Under new management, this growth rate would be increased to 8 per cent per year, without any additional capital investment required.
Required
(a)
What is the gain from the acquisition?
(b)
What is the cost of the acquisition if Holiday pays
£25
in cash for each Leisu
r
e sha
r
e? Should it go ahead?
(c)
What
is
the
cost
of
the
acquisition
if
Holiday
o
f
fers
one
of
its
own
sha
r
es
for
every
th
r
ee
sha
r
es
of
Leisu
r
e?
Should it go ahead?
(d)
How would the cost of the cash o
f
fer and the sha
r
e o
f
fer alter if the expected g
r
owth rate of Leisu
r
e we
r
e not
changed by the takeover? Does it a
f
fect the decision?