Question

In: Finance

Gamma plc has made an offer of one of its shares for every three of Baker...

Gamma plc has made an offer of one of its shares for every three of Baker plc. Synergistic benefits from the merger would result in an increase in after-tax earnings of 4 million € per annum. Extracts from the latest accounts of both companies are as follows:

Gamma Plc

Baker Plc

Profit after tax, million €

120

35

Number of shares outstanding, million

400

90

Market price of shares, €

2.50

1.20

Assume that the price of Gamma Plc’s shares rises by 0.50 € after the merger and that Gamma issues new shares as consideration.

What will be the price-earnings ratio of the group?

Solutions

Expert Solution

After Tax Earnings of merged entity
= Profit after Tax of Gamma Plc + Profit After Tax of Baker Plc
+ Increase due to Merger
= €120000000 + €35000000 + €4000000
= €159000000
No of Shares issued to Baker Plc
= No of Shares outstanding of Baker Plc * Swap Ratio
= 90000000 * 1/3
= 30000000
Earnings Per Share of a merged entity
= After Tax Earnings / (No of Shares outstanding of Gamma Plc + No of Shares issued to Baker Plc)
= €159000000 / (400000000 + 30000000)
= €159000000 / (430000000)
= €0.37
Market Price Per Share of Gamma Plc after merger
= Current Market Price + Price Rise
= €2.50 + €0.50
= €3.00
So,
Price Earnings Ratio of Group
= Market Price after merger / Earnings per Share after merger
= €3 / €0.37
= 8.11

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