Question

Your company has earnings per share of ​$6. It has 1 million shares​ outstanding, each of which has a price of ​$60. You are thinking of buying​ TargetCo, which has earnings per share of ​$​3, & 1 million shares​ outstanding, and a price per share of ​$52.50. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Complete parts a through d below.

1. If you pay no premium to buy​ TargetCo, what will your earnings per share be after the​ merger?
2. Suppose you offer an exchange ratio such​ that, at current​ pre-announcement share prices for both​ firms, the offer represents a ​15% premium to buy TargetCo. What will your earnings per share be after the​ merger?
3. What explains the change in earnings per share in part​ a? Are your shareholders any better or worse​ off?
4. What will your​ price-earnings ​(​P/E​) ratio be after the merger​ (if you pay no​ premium)? How does this compare to your ​(​P/E​) ratio before the​ merger? How does this compare to​ TargetCo's pre-merger ​(​P/E​) ​ratio?

Answer 1