A merger between Minnie Corporation and Mickey Corporation is under consideration. The financial information for these...

A merger between Minnie Corporation and Mickey Corporation is under consideration. The financial information for these firms is as follows: Minnie Corporation Mickey Corporation Total earnings $2,025,000 $4,050,000 Number of shares of stock outstanding 270,000 1,080,000 Earnings per share $7.50 $4 Price-earnings ratio (P/E) 10X 20X Market price per share $75 $75 a. Assume a 100 percent premium will be paid and there is a 32 percent synergistic benefit to total earnings from the merger. What is the change in Mickey Corporation's earnings if it merges with Minnie Corporation? (Round the final answer to 2 decimal places.) Change in earnings per share post merge

Expert Solution

The information available is tabulated below:

Particulars	Minnie Corporation	Mickey Corporation
Toal Earnings (A)	$2,025,000	$4,050,000
No. of Outstanding shares (B)	270,000	1,080,000
EPS (A/B)	$7.5	$3.75
Price Earning's ratio	10	20
Market price per share	$75	$75

Now the swap ratio can be based on either on (A) EPS or (B) MPS

Let first take as per EPS, swap ratio = 7.5:3.75 = 2:1

i.e. Shareholders of Minnie Corporation gets 2 share of the merged entity for every 1 share held and Shareholders of Mickey Corporation gets 1 share of the merged entity for every 1 share held

Therefore, total no. of shares = 540,000 + 1,080,000 = 1,620,000

Total earnings of the merged entity (after synergy of 32%) = 132% of (($2,025,000 + $4,050,000) = $8,019,000

Therefore, earnings of Mickey Corporation post merger = 8019000/1620000*1080000 = $5,346,000 and change in earnings = $1,296,000

Also for Mickey corporation EPS pre merger = $3.75 and EPS post meger = $5, there is a change of $1.25 per share

jeff jeffy answered 1 year ago

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