Question

13. Able Corporation is considering the acquisition of Target Corporation. Target Corporation has 1,020,000 shares of stock, with earnings per share of $4.50 and a market price per share of $80. Able Corporation has 1,565,000 shares outstanding with earnings per share of $6.00 and a market price of $55. The merger is expected to increase net income of the combined companies by $2,600,000 (in synergistic benefits). What is the maximum exchange ratio Able Corporation can offer and what is the minimum exchange ratio Target Corporation can accept?

Answer 1

Given in the question

Able Corporation is considering the acquisition of Target Corporation.

	Able	Target
O/S shares (A)	15,65,000	10,20,000
EPS (B)	6	4.5
MPS	55	80
Net earnings (A*B)	93,90,000	45,90,000

Merger is expected to increase net income by 26, 00,000

Maximum Exchange ratio that Able can offer

We have been given the synergy in earnings hence Using EPS method

EPS of Able before merger=EPS of merged entity

6= (Earnings of Able+ Earnings of target + Synergy)/ (Shared of able + Exchange ratio*Shares of Target)

6=(93,90,000+45,90,000+26,00,000)/(15,65,000+Excahnge ratio * 10,20,000)

15, 65,000+10, 20,000*Exchange ratio=27, 63,333

Maximum exchange ratio that able can offer Exchange ratio=1.17

Minimum exchange ratio that target can accept

EPS of Target before merger=Equivalent EPS in merged entity

4.5=EPS of merged entity*Exchange ratio

4.5={(93,90,000+45,90,000+26,00,000)/(15,65,000+Excahnge ratio * 10,20,000)} *exchange ratio

4.5= {1, 65, 80,000/ (15, 65, 000+10, 20, 000*Exchange ratio)}* exchange ratio

4.5 *(15, 65, 000+10, 20, 000*Exchange ratio) =1, 65, 80, 00*exchange ratio

70, 42, 500=1, 19, 90,000 Exchange ratio

=0.59

Minimum exchange ratio that target can accept=0.59