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Question B1 Westford plc is a company listed in the UK

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Question B1 Westford plc is a company listed in the UK. It is a major manufacturer of domestic kitchen equipment. The directors are planning to expand the company's product range through the acquisition of a smaller competitor. As such, the company plans to acquire Morgan plc and intends to make an offer for £60 per ordinary shares of the company, a 50 percent acquisition premium over the current market price. They feel that the synergies generated by the combined entities will be greater than the total price paid for the target company. Peter, the finance director of Westford plc, argues that “this valuation can easily be justified, using a price-earnings analysis. Westford plc has a price-earnings ratio of 15, and we expect that we will be able to generate long-term earnings for Morgan plc of £5 per share. This implies that Morgan plc is worth £75 to us, well below our £60 offer price." Required: Critically evaluate the arguments put forward by the finance director and discuss the validity of the assumptions made by him.