Question

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

	Jolie			Pitt
Price–earnings ratio		13.2			37
Shares outstanding		99,000			370,000
Earnings	$	230,000		$	920,000

   

Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie.

a-1	What will the EPS of Pitt be after the merger? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

EPS

$

a-2	What will the PE ratio be if the NPV of the acquisition is zero? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

PE

  

b.	What must Pitt feel is the value of the synergy between these two firms?

  

Synergy value

$

Answer 1

Solution

The Calculation shall be made as follows,

Calculation of Individual and Total Market values:

Particulars	Pitt Ltd.	Jolie Ltd.
Price-Earnings Ratio	37	13.2
Total Earnings (in $)	920,000	230,000
Number of Shares Outstanding	370,000	99,000
Earnings per share (in $)	2.486 (Approx.)	2.323 (Approx.)
Market Price per share (i.e. EPS x P/E) (in $)	91.982	30.664
Total Market Value (Shares Outstanding x Market Price) (in $)	34,033,340	3,035,736

Therefore, as we have the Individual Market Values,
Market Value of un-merged firms (in $) = 34,033,340 + 3,035,736 = 37,069,076

Now we can proceed with the solution.

(a1) Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie.
Therefore, Number of shares = 1/3 x 99,000 = 33,000

Now, Total Number of shares outstanding with Pitt Ltd. post-merger = 370,000 + 33,000 = 403,000
and, Total Earnings post-merger (in $) = 920,000 + 230,000 = 1,150,000

Therefore, Post-Merger Earnings per share (in $) = 1,150,000 / 403,000 = 2.674 (Approx.)

Answer: EPS of Pitt after the merger - $2.674

(a2) As the NPV is 0, therefore the equation will be as follows,
Market Value of Target Company - Cost of Acquisition = 0
Or, 3,035,736 - (33,000 x Market Price per share of Pitt Ltd.) = 0
Or, Market Price per share of Pitt Ltd. = 3,035,736 / 33,000
Or, Market Price per share of Pitt Ltd. = 91.992

Therefore, New P/E ratio will be = Market Price / Earnings per share = 91.992 / 2.674 = 34.40 (Approx.)

Answer: P/E after acquisition if NPV of Acquisition is 0 - 34.40

(b) Post-merger Market price per share (in $) = 91.992
Total Number of Shares = 403,000

Therefore, Post merger market value (in $) = 91.992 x 403,000 = 37,072,776

Now, Value of Synergy (in $) = Market Value of Merged Firm - Market Value of Un-merged firm
= 37,072,776 - 37,069,076
= 3700

Answer: Value of Synergy - $3,700