Consider the following premerger information about Firm A and Firm B: Assume tha
ID: 2718312 • Letter: C
Question
Consider the following premerger information about Firm A and Firm B:
Assume that Firm A acquires Firm B via an exchange of stock at a price of $41 for each share of B's stock. Both A and B have no debt outstanding.
What will the earnings per share (EPS) of Firm A be after the merger? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What will Firm A's price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price–earnings ratio does not change)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What will the price–earnings ratio of the postmerger firm be if the market correctly analyzes the transaction? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
If there are no synergy gains, what will the share price of A be after the merger? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What will the price–earnings ratio be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What does your answer for the share price tell you about the amount A bid for B? Was it too high? Too low?
Firm A Firm B Total earnings $ 1,700 $ 1,200 Shares outstanding 900 250 Price per share $ 35 $ 39Explanation / Answer
a)Cost of acquisition=(41*250)=$10,250
No of new shares has to be issued=10250/35=292.85
EPS aft merger=(1700+1200)/(900+293)
=$2.43
b)The PE of acquring firm =35/(1700/900)=18.5291 times
Assuming PE ratio does nt change the new stock price
=18.5291*2.43=$45.05
c) If market correctly analyze the earnings, the stock price will remain unchange
New PE is =35/2.43=14.4 times
d1)The new share price will be combined value of both exisiting firms divided by the no osf shares outstanding in merged company
=[(900*35)+(250*39)] /(900+293)
=$34.58
d2)PE of merged company
=34.58/2.43
=14.22
d3)too low. as the proposedbid price this is a negative NPV acquisition for A since share price will come down