Question

Copper Pipes Incorporated (CPI) is planning to acquire Base Copper Mines (BCM). Currently, BCM has 8000 shares trading at $32.50 per share. CPI estimates the transaction costs of the acquisition are $15,000 and the required return on BCM's assets is 10%. Acquiring BCM will generate over the next 20 years incremental cash flows as follows: Source Revenues Costs Amount of Change Increase $20,500 Increase $11000 Source Taxes Amount of Change Decrease $5000 Increase $3500 a. What are the incremental cash flows to CPI? (3 marks) b. What is the maximum price CPI can pay for BCM? (6 marks) PI has 9600 shares outstanding at $42.50 per share market price. CPI offers BCM shareholders $37.50 per share in cash. If the offer is accepted, what would be the new price per share of CPI after the purchase? (5