Question

World Enterprises is determined to report earnings per share of $2.67. It therefore acquires the Wheelrim and Axle Company. You are given the following facts:

	World Enterprises				Wheelrim and Axle				Merged Firm
Earnings per share		$	2.00			$	2.50			$2.67
Price per share		$	40			$	25			?
Price–earnings ratio			20				10			?
Number of shares			100,000				200,000			?
Total earnings		$	200,000			$	500,000			?
Total market value		$	4,000,000			$	5,000,000			?

There are no gains from merging. In exchange for Wheelrim and Axle shares, World Enterprises issues just enough of its own shares to ensure its $2.67 earnings per share objective.

C. What is the cost of the merger to World Enterprises? (Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to the nearest whole number.)

Cost of merger            $

d. What is the change in the total market value of the World Enterprises shares that were outstanding before the merger? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to the nearest whole number.)

Change in share value            $

Answer 1

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