Question

Consider the following information for two all-equity firms, A and B:

	Firm A	Firm B
Total earnings	$1,000	$400
Shares outstanding	100	80
Price per share	$80	$30

Firm A is acquiring Firm B by exchanging 25 of its shares for all shares in B

16. What is the equivalent cash cost of the merger if the merged firm is worth $11,000?     

____

1. $2,000
2. $2,200
3. $2,400
4. $2,800

17. What is Firm A’s new P/E ratio after merger?

____

A) 8.76

B) 8.00

C) 7.86

D) 6.78

Answer 1

Answer
Particulars	Firm A	Firm B
Total earnings	$   1,000.00	$    400.00
Shares outstanding	100	80
Price per share	$         80.00	$      30.00
Firm A is acquiring Firm B by exchanging 25 of its shares for all shares in B
Share Capital	$   8,000.00	$ 2,400.00
Profit	$   1,000.00	$    400.00
Value of Firm	$   9,000.00	$ 2,800.00
Merger Firm Value	$ 11,000.00
Value of Firm A	$   9,000.00
Purchased Value of Firm B	$   2,000.00
Cash Cost of Merger
25 shares of Firm A @80	2000
New P/E ratio
Total Earnings	$   1,400.00
Revised Shares	125
EPS	$         11.20
Price (11000/125)	$         88.00
P/E Ratio	7.86