Cascade Mining ($28Mil Assets) has an estimated beta of 1.6. The company is considering the acquisition of Hanson Welding ($42 Mil assets) that has a beta of 1.2.
Cascade last paid a dividend of $1 per share 2010. In 2007, the Cascade paid a dividend of $0.89. This dividend growth rate is expected to be constant for the foreseeable future if the merger is not completed. If the merger is successful, the expected dividend for next year, that is, D1 is expected to be $1.03 and the new long-term growth rate will be 7.5% as a result of the merger.
What is the expected new beta of cascade after the acquisition?
The risk-free rate is 7% and the market return is estimated as 12%. What is your estimate of the required return of investors in Cascade before and after the acquisition?
What is the value of a share of Cascade prior to the acquisition?
What is the new value of a share of stock in Cascade, assuming the acquisition is completed?
Would you recommend that Cascade go ahead with the acquisition? Please support your answer.
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