Question

World Enterprises is determined to report earnings per share of $2.67, and therefore acquires the Wheelrim and Axle Company. You are given the following facts: World Enterprises Wheelrim and Axle Merged Firm Earnings per share $2.00 $2.50 $2.67 Price per share $40 $25 ? Price-earnings ratio 20 10 ? Number of shares 100,000 200,000 ? Total earnings $200,000 $500,000 ? Total market value $4,000,000 $5,000,000 ? There are no gains from merging. In exchange for Wheelrim and Axle shares, World Enterprises issues just enough of its own shares to ensure its $2.67 earnings per share objective. a. Complete the above table for the merged firm. b. How many shares of World Enterprises are exchanged for each share of Wheelrim and Axle? c. What is the cost of the merger to World Enterprises? d. What is the change in the total market value of the World Enterprises shares that were outstanding before the merger?

Answer 1

Solution

a. Complete the above table for merged firm.

First we will calculate the below values :

Total Market value = $4000000 + $ 5000000 = $9000000

Total Earnings = $200000 +$500000 = $700000

Earnings per share is $2.67 per share,so we will calculate the number of shares outstanding as

$700000/$2.67 = 262172

Price per share = $9000000 / $262172 = $34.33

Price earnings ratio = $34.33 / $2.67 = 12.9

The completed table is below

	World Enterprises	Wheelrim and Axle	Merged Firm
Earnings per share	$2.00	$2.50	$2.67
Price per share	$40	$25	$34.33
Price Earnings Ratio	20	10	12.9
Number of shares	100000	200000	262172
Total Earnings	$200000	$500000	$700000
Total market value	$4000000	$5000000	$9000000

b) How many shares of world enterprises exchanged for each share of Wheelrim and Axle

shares issued by world enterprises : 262172 - 100000 = 162172

Wheelrim and Axle has 200000 shares outstanding,so new shares to take over will be : 162172 / 200000

: 0.81

0.81 shares of World enterprises were exchanged for each share of Wheelrim and Axle

C) Cost of merger to World enterprises

World enterprises paid 162172 * $34.33 = $5567365 for a firm worth of $500000 .

Cost = $5567365 - $500000 = $567365

D)Change in market value of share of world enterprise that were outstanding before merger

The change in market value will be a decrease of $567365