Question

The shareholders of Barley Corporation have voted in favor of a buyout offer from Wheat Corporation. Information about each firm is given here:

	Barley	Wheat
Price/earnings ratio	13.5	21
Shares outstanding	90,000	210,000
Earnings	$180,000	$810,000

Barley shareholders will receive one share of Wheat stock for every three shares they hold of Barley.

Required

1)      What will the EPS of Wheat be after the merger? What will be the P/E ratio if the NPV of the acquisition is 0?

2)      What must Wheat feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover?

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Answer 1

Solution:-

1. To Calculate EPS of wheat agter Merger-

EPS after Merger =

EPS after Merger =  

EPS after Merger = $4.125

We need to Calculate Current Market Price of Wheat-

Current Market Price =

Current Market Price =

Current Market Price = $81

To Calculate PE Ratio if NPV of the Acquisation is 0-

PE Ratio =

PE Ratio =

PE Ratio = 19.64 Times

B. To calculate the value of the synergy between these two firms-

First we need to calculate Cost to Wheat for Purchase of Barley-

Cost = Share Outstanding * Exchange Ratio * Current Market Price

Cost =

Cost = $24,30,000

Then we need to calculate Market value of Barley-

Market Value of barley = Earnings * PE Ratio

Market Value of barley = 1,80,000 * 13.50

Market Value of barley = $24,30,000

Synergy = Market Value of barley - Cost

Synergy = $24,30,000 - $24,30,000

Synergy = $0.

Their is no synergy benefit to the wheat. While wheat is motivated to purchase the Barley may be due to other Financial Reasons.

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