Question

Given the following case, answer questions 18 and 20 below:

Group Co currently has 4,000 shares outstanding each sold for $100, whereas, Intel Inc has 3,000 shares outstanding each sold for $50. The earnings per share for Group Co and Intel Inc is $11 per share. Group Co decides to acquire Intel Inc by offering three new shares of Group Co for every six shares of Intel Inc. Assume that the merger increases the value of the combined firms by $30,000.

18. What is the Earning Per Share for Group Co. after merger? *

a. $11 per share

b. $12 per share

c. $13 per share

d. $14 per share

e. None of the above

19. What is the price earnings ratio of Group Co. after the merger? *

a. 5.35

b. 7.14

c. 7.38

d. 6.31

e. None of the above

20. What is the cost of the merger? *

a. Zero

b. $2,000

c. $7,000

d. $4,000

e. None of the above

Answer 1

18 d $14

19 e None of the above

20 a zero

Workings

				(No of shares * Market price)
	Before merger	No of shares	market price	Market value
	Group Co	4000	100	400000
	Intel	3000	50	150000
	Total			550000
	After merger	No of shares	Formula	Market value	Formula
	Group Co	4000
	Intel	1500	(3000*3/6)
	Group Co total	5500		580000	(550000+30000)
	Market price	105.4545455	(Market value of 580000/No of shares 5500)
	Earnings per share (EPS)
	Before merger EPS	11
	Before merger no of shares	7000	(Group Co 4000+Intel 3000)
	Total earnings	77000	(EPS*No of shares)
	After merger
	Total earnings	77000	(Total Profit is same as before)
	No of shares	5500	(4000+1500 as above)
18	EPS after merger	14
	Price earnings ratio
19	Price/Earnings	7.53
	Value of Intel Co	150000
	Value of Group Co shares offered to Intel Co	150000	(1500 shares *100 price of Group Co shares)
20	Cost of Merger	0