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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