Question

Your company has earnings per share of $ 3.58 . It has 1.1 million shares? outstanding, each of which has a price of $ 43 . You are thinking of buying? TargetCo, which has earnings per share of $ 0.90 ?, 1.1 million shares? outstanding, and a price per share of $ 28 . 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 15 % 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 ?$nothing . ? (Round to the nearest? cent.) b. Suppose you offer an exchange ratio such? that, at current? pre-announcement share prices for both? firms, the offer represents a 15 % premium to buy TargetCo. What will your earnings per share be after the? merger? The EPS after the merger is ?$nothing . ? (Round to the nearest? cent.) c. What explains the change in earnings per share in part ?(a?)? ?(Select the best choice? below.) A. EPS always decline if the firm issues new shares to pay for a merger. B. EPS declines because you are over minus paying for TargetCo. C. EPS declines because TargetCo has a higher price dash earnings ratio than your firm. Are your shareholders any better or worse? off????(Select the best choice? below.) A. In this? case, your shareholders are neither worse nor better off. B. In this? case, your shareholders are worse off. C. In this? case, your shareholders are better 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? The? P/E ratio after the merger is nothing . ? (Round to two decimal? places.) How does this compare to? TargetCo's premerger? P/E ratio? The? P/E ratio before the merger was nothing . ? (Round to two decimal? places.) ?TargetCo's premerger? P/E ratio was nothing . ? (Round to two decimal? places.)

Answer 1

First we need to determine how many shares to issue to pay for Target. Since our company has a price of $43 per share with 1,100,000 shares outstanding, and Target has a price of $28 per share then we must issue 28/43*1,100,000 = 716279 shares to pay for Target. Once issued, the total number of shares outstanding would be 1,816,279.

Next we compute for total earnings. Our company has earnings of $.3.58 per share, and at 1,100,000 shares that comes out to total earnings of $3,938,000. Target has earnings of $0.9 per share, and at 1,100,000 shares that comes out to total earnings of $990,000. Therefore the total earnings after the merger would be $4,928,000. Finally we can compute the earnings per share after the merger as:

If the offer represents a 15% premium to buy Target then we will have to pay $28*(1 + 15%) = $32.2 per share. we then go through the same steps as in (a). This time we would issue 32.2/43*1,100,000 =

8, 23,720.93 shares to pay for Target so the total number of shares outstanding would become 1,923,721. The total earnings would still be $$4,928,000, so the earnings per share after the merger would be:

The change in earnings per share in part (a) is the result of our company issuing shares of stock to buy another company with a higher price-to-earnings ratio. We cannot say whether our shareholders are any better or worse off because it would depends on the future prospects of Target. It may be that Target has a higher price-to-earnings ratio because its earnings are expected to grow faster or its business is less risky.

The market capitalization of our company was $43*1,100,000 shares = $47,300,000 and total earnings was $3.58*1,100,000 = $3,938,000. Meanwhile the market capitalization for Target was $28*1,100,000 = $30,800,000 and its total earnings was $0.9*1,100,000 = $990,000. So before the merger, the price-to-earnings ratio of our company was $47,300,000 /$3,938,000= 12 times. The price-to-earnings ratio for Target was $30,800,000 /$990,000= 31 times, and the price-to-earnings ratio of the merged firm is: