Question

Orion plc is determined to report earnings per share of 267p. It therefore acquires Mintaka plc. There are no gains associated with the acquisition. In exchange for Mintaka’s shares, Orion issues just enough of its own shares to ensure its 267p earnings per share objective.

Please find the following information:

	Orion	Mintaka
Earnings per Share	£2.00	£2.50
Price per Share	£40	£25
Price-Earnings Ratio	20	10
Number of Shares	100,000	200,000
Earnings	£200,000	£500,000
Market Value	£4,000,000	£5,000,000

Required:

a) How many shares in the combined firm have to be offered for each share in

Mintaka?
b) Derive the earnings per share, price per share, price-earnings ratio, earnings,

and market value associated with the combined firm.

c) WhatisthecostoftheacquisitiontoOrion?

[Total: 20 Marks]

d) What is the change in the market value of Orion’s shares that were outstanding before the acquisition?

Answer 1

Given data :

Orion plc is determined to report earnings per share of 267p. It therefore acquires Mintaka plc. There are no gains associated with the acquisition. In exchange for Mintaka’s shares, Orion issues just enough of its own shares to ensure its 267p earnings per share objective.

a) Calculating shares in the combined firm have to be offered for each share in Mintaka

= Earnings Orion + Earnings Mintaka

=  £200,000 + £500,000

= £700,000

Given  Earnings per share EPS  = 267 or also £2.67

combined firm have to be offered for each share in Mintaka / Earnings per share EPS

=700,000/2.67

= 262,172 shares

From the above table no of shares of Orion = $100,000.

From the above table no of shares of Mintaka = $200,000.

= 262,172 shares - no of shares of Orion

=  262,172 - 100,000

total shares of mintaka = 162,172 shares of Mintaka

total shares of mintaka / no of shares of Mintaka

= 162,172 / 200,000

= 0.81086

0.81086 shares in the combined firm have to be offered for each share in Mintaka

b ) Calculating earnings per share, price per share, price-earnings ratio, earnings,and market value associated with the combined firm.

Total firm amount = 700,000

Earnings per share EPS  = 267 or also £2.67

Market value = £4,000,000 + £5,000,000

= £9,000,000

Market value / no share of Mintaka

= 9,000,000/262,172

= 34.32860996

PE ratio :

Market price per share/ Earning per share

= 34.32860996 / 2.67

= 12.857

c) Calculating cost of the acquisition to Orion

= 162,172 x 34.328609

= 5,567,139

d) Calculating change in the market value of Orion’s shares that were outstanding before the acquisition.

= 40 x 100,000

= 4,000,000

Market vakue of Orion's shareholders after acquisition = 34.328609 x 100,000

= 3,432,861

Change in market value of Orion's shares that are outstanding before the acquisition = £567,139