In early 2009 Ham Inc.\'s management was considering making an offer to buy Egg
ID: 2679899 • Letter: I
Question
In early 2009 Ham Inc.'s management was considering making an offer to buy Egg Corporation. Egg's projected operating income (EBIT) for 2009 was $30 million, but Ham believes that if the two firms were merged, it could consolidate some operations, reduce Egg's expenses, and raise its EBIT to $47.5 million. Neither company uses any debt, and they both pay income taxes at a 40% rate. Ham has a better reputation among investors, who regard it as better managed and also less risky, so Ham's stock has a P/E ratio of 15 versus a P/E of 12 for Egg. Since Ham's management will be running the entire enterprise after a merger, investors will value the resulting corproation based on Ham's P/E. Based on expected market values, how much synergy should the merger create?Answer
$175.50
$203.00
$167.10
$173.40
$211.50
Explanation / Answer
$167.10