Consider the following premerger information about Firm A and Firm B : Firm A Fi
ID: 2776841 • Letter: C
Question
Consider the following premerger information about Firm A and Firm B:
Firm A
Firm B
Total earnings
$2,100
$800
Shares outstanding
900
200
Price per share
$27
$31
Assume that Firm A acquires Firm B via an exchange of stock at a price of $33 for each share of B's stock. Both A and B have no debt outstanding.
A. What will the earnings per share, EPS, of Firm A be after the merger? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
B. 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 final answer to 2 decimal places. (e.g., 32.16))
C. 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 final answer to 2 decimal places. (e.g., 32.16))
D. 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 final answer to 2 decimal places. (e.g., 32.16))
E. What will the price–earnings ratio be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
F. What does your answer for the share price tell you about the amount A bid for B? Was it too high or too low?
Consider the following premerger information about Firm A and Firm B:
Explanation / Answer
Firm A Firm B Total earnings 2,100 800 Shares outstanding 900 200 Price per share 27 31 EPS 2.333333 4 P/E Ratio 11.57143 7.75 Firm A acquires stock at 33 so total value 6600 A. Total Earnings 2,900 Total Stock 1100 Post merger EPS 2.636364 B.Firm A share price will be 30.50649 Incorrectly analyzedshare price 28.09091 Correctly analyzed price C. PE Ratio 10.65517 D. Stock price 28.09091 E. PE Ratio 10.65517 F. The bid was way high it could have been around 31