Question

Your company has earnings per share of

$ 3.81$3.81.

It has

1.51.5

million shares​ outstanding, each of which has a price of

$ 38$38.

You are thinking of buying​ TargetCo, which has earnings per share of

$ 1.27$1.27​,

1.51.5

million shares​ outstanding, and a price per share of

$ 26$26.

You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction.

a. If you pay no premium to buy​ TargetCo, what will your earnings per share be after the​ merger?

b. Suppose you offer an exchange ratio such​ that, at current​ pre-announcement share prices for both​ firms, the offer represents a

25 %25%

premium to buy TargetCo. What will your earnings per share be after the​ merger?c. What explains the change in earnings per share in part

​(a​)?

Are your shareholders any better or worse​ off?

d. What will your​ price-earnings 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 premerger​ P/E ratio?

a. If you pay no premium to buy​ TargetCo, what will your earnings per share be after the​ merger?

The EPS after the merger is

​$nothing.

​ (Round to the nearest​ cent.)b. Suppose you offer an exchange ratio such​ that, at current​ pre-announcement share prices for both​ firms, the offer represents a

25 %25%

premium to buy TargetCo. What will your earnings per share be after the​ merger?The EPS after the merger is

​$nothing.

​ (Round to the nearest​ cent.)c. What explains the change in earnings per share in part

​(a​)?

​(Select the best choice​ below.)

Answer 1

Answer to a:		Amount in Million $
Calculation of Earnings Per Share After Merger
There is No Syngeries after merger
Combined Earnings	=	(3.81*1.5 Million Shares)+(1.27*1.5 Million Shares)
	=	7.62
Total No of Shares	=	1.5+1.5
	=	3 Million Shares
Earnings Per Share	=	Combined Earnings
(After Merger)		Total No of Shares
	=	7.62
		3
	=	$2.54
Answer to b:
Exchange Ratio	=	Price of Target Co
		Price of Purchase Co
	=	26
		38
	=	0.68
Combined Earnings	=	7.62
Total No of Shares	=	1.5+ (1.5*0.68)
	=	2.52 Million Shares
Earnings Per Share	=	Combined Earnings
(After Merger)		Total No of Shares
	=	7.62
		2.52
	=	$3.02
Answer to c:
Due to Exchange Ratio based on Price, EPS after meger will increase as compared to Ans (a) & Shareholders will be in Better position.
Answer to d:
P/E ratio After Merger	=	MPS
		EPS
	=	38
		2.54
	=	14.96
P/E ratio Before Merger	=	MPS
		EPS
	=	38
		3.81
	=	9.97
P/E Ratio will be better than before.
If Compared with Target Co:
P/E Ratio of target Co	=	MPS
		EPS
	=	26
		1.27
	=	20.47
P/E Ratio is not better if compared with Target Co of Merged Co.