Question

The Jeter Corporation is considering acquiring the A-Rod Corporation. The data for the two companies are as follows:

	A-Rod Corp.			Jeter Corp.
Total earnings	$	572,000		$	2,400,000
Number of shares of stock outstanding		220,000			1,200,000
Earnings per share	$	2.60		$	2.00
Price-earnings ratio (P/E)		20			26
Market price per share	$	52		$	52

a. The Jeter Corp. is going to give A-Rod Corp. a 50 percent premium over A-Rod’s current market value. What price will it pay? (Do not round intermediate calculations and round your answer to the nearest whole number.)
  

b. At the price computed in part a, what is the total market value of A-Rod Corp.? (Use the number of A-Rod Corp. shares times price.) (Do not round intermediate calculations and round your answer to the nearest whole number.)
  

c. At the price computed in part a, what is the P/E ratio Jeter Corp. is assigning A-Rod Corp? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

d. How many shares must Jeter Corp. issue to buy the A-Rod Corp. at the total value computed in part b? (Do not round intermediate calculations and round your answer to the nearest whole number.)
  

e. Given the answer to part d, how many shares will Jeter Corp. have after the merger? (Do not round intermediate calculations and round your answer to the nearest whole number.)
  

f. What are the new postmerger earnings per share? (Do not round intermediate calculations and round your answer to 2 decimal places.)

Answer 1

We can calculate the desired result as follows:

A) Price that Jeter Corp. is going to give A-Rod Corp is:

= Current market price of A-Rod * ( 1 + 50% )

= 52 * ( 1.50 )

= $ 78 per share

B) Market Value of  A-Rod Corp at the above calculated price of $ 78 per share is

= Total no of shares outstanding of A-Rod corp. * price per share

= 220,000 * 78

= $ 17,160,000

C) P/E ratio assigned to A-Rod based on price of $ 78 is as follows:

P/E ratio = Price / Earnings per share

= 78 / 2.60

P/E ratio = 30 times

D) Number of Shares that Jeter Corp. must issue to buy the A-Rod Corp are:

= Total market value of A-Rod used in purchase / Current market price of Jeter Corp.

= 17,160,000 / 52

= 330,000 Shares have to be issued

E) Total Share that Jeter corp will have = Old Shares + New Shares

= 1,200,000 + 330,000

= 1,530,000 Shares

F) New post merger earnings per share is as follows:

= Total Earnings post merger of both companies / Total no of shares post merger

Total Earnings post merger of both companies = 572,000 + 2,400,000

= $ 2,972,000

Total no of shares post merger = 1,530,000

EPS = 2,972,000 / 1,530,000

= $ 1.94

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