The Following Information Relates to the Planned Acquisition of a Target

Essay

The following information relates to the planned acquisition of a target. Cash flow and synergy figures are after tax. ($M)
$\begin{array}{lr}\text { EstimatedCash Flow for the first } 3 \text { years }&\$50,\$65,\$75\\\text { Estimated amual synergies }&\$15\\\text { Planned reinvestment (including synergies) }&40\%\\\text { Projected anmual growth rate beyond the third year }&4\%\\\text { Return on the market }\left(k_{M}\right)&16\%\\\text { The } \left.90 \text { day } \mathrm{T} \text { bill rate ( } \mathrm{k}_{\mathrm{RF}}\right)&8\%\\\text {Beta of the acquiring company }&1.25\\\text { Beta of the target company}&1.75\\\text { Number of outstanding shares of target }&10 \text { million }\\\text { Today's per share selling price of target }&\$16.50\end{array}$
Calculate the maximum percentage premium that should be offered to the target company's shareholders.