B Has 1 Million Shares Priced at $2 Each

question 37

Multiple Choice

B has 1 million shares priced at $2 each.A plans to acquire 50 per cent of shares in B.The change in net operating cash flows expected from the takeover is $500 000 p.a.The cost of capital for A's assets is 10 per cent and 12.5 per cent for B's assets.What is the maximum price per share A should offer B in order to take it over given the aforementioned information?

• A)$7 million
• B)$6
• C)$6.70
• D)$12

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Definitions:

Payback Method

The payback method is a capital budgeting technique that calculates the time required to recoup the cost of an investment, focusing on cash flow and ignoring the time value of money.

Capital Budgeting

The process of evaluating and selecting long-term investments that are in alignment with the company's goal of wealth maximization.

Financial Institution

An establishment that conducts financial transactions such as investments, loans, and deposits.

Capital Budget Committee

A capital budget committee is a group of individuals within an organization responsible for reviewing, approving, and overseeing large capital expenditures or investments.