Question

Your company has earnings per share of

$ 4.40.

It has

1.1

million shares​ outstanding, each of which has a price of

$ 40.40.

You are thinking of buying​ TargetCo, which has earnings per share of

$2.20​,

1

million​ shares, and a price per share of

$23.60.

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 be your earnings per share after the​ merger? (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 %15%

premium to buy TargetCo. What will be your earnings per share 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 be your​ price-earnings ratio 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?

Answer 1