91Ó°ÊÓ

Harrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 5 percent and the market risk premium is 6 percent. Van Buren currently expects to pay a year-end dividend of \(\$ 2.00\) a share \(\left(\mathrm{D}_{1}=\right.\) \(\$ 2.00\) ). Van Buren's dividend is expected to grow at a constant rate of 5 percent a year, and its beta is \(0.9 .\) What is the current price of Van Buren's stock?

Harrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 5 percent and the market risk premium is 6 percent. Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at \(\$ 2.00\) a share, but synergies will enable the dividend to grow at a constant rate of 7 percent a year (instead of the current 5 percent). Harrison also plans to increase the debt ratio of what would be its Van Buren subsidiary-the effect of this would be to raise Van Buren's beta to \(1.1 .\) What is the per-share value of Van Buren to Harrison Corporation?

The Stanley Stationery Shoppe wishes to acquire The Carlson Card Gallery for \(\$ 400,000\). Stanley expects the merger to provide incremental earnings of about \(\$ 64,000\) a year for 10 years. Ken Stanley has calculated the marginal cost of capital for this investment to be 10 percent. Conduct a capital budgeting analysis for Stanley to determine whether or not he should purchase The Carlson Card Gallery.