Question

World

Enterprises is determined to report earnings per share of $2.80. It therefore acquires the Wheelrim and Axle Company. 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 $2.80 earnings per share objective.

a. Complete the table below for the merged firm. (Do not round intermediate calculations. Round "Price per share" and "Price-earnings ratio" to 2 decimal places and other answers to the nearest whole number.)

	World Enterprises Wheelrim and Axle Merged Firm Earnings per share $2.00 $3.00 $2.80 Price per share $30 $15 Price-earnings ratio 15 5 Number of shares 290,000 390,000 Total earnings $580,000 $1,170,000 Total market value $8,700,000 $5,850,000

b. How many shares of World Enterprises are exchanged for each share of Wheelrim and Axle?

c. What is the cost of the merger to World Enterprises? (Do not round intermediate calculations. Round your answer to the nearest whole dollar.)

d. What is the change in the total value of the World Enterprises shares that were outstanding before the merger? (Do not round intermediate calculations. Round your answer to the nearest whole dollar. Enter your answer as a positive value.)

Answer 1

a-	World Enterprises	Wheelrim and Axle	Merged Firm
	Earnings per share	$2.00	$3.00	$2.80
	Price per share	$30	$15	23.28
	Price-earnings ratio	15	5	$8.31
	Number of shares	290,000	390,000	625000
	Total earnings	$580,000	$1,170,000	$1,750,000
	Total market value	$8,700,000	$5,850,000	$14,550,000
	No of shares	2.80 = 1750000/number of shares	number of shares = 1750000/2.8	625000
	Price per share	total market value/no of shares after merger	14550000/625000	23.28
	PE ratio	market price/EPS	23.28/2.8	8.31
	total market value	8700000+5850000		14550000
	Total earnings	580000+1170000		1750000
b-	No of total share after merger			625000
	Shares issued before merger			290,000
	new shares issued			335,000
	shares exchanged per share	335000/390000		0.86
c-	total purchase consideration	new share issued*price per share	335000*23.28	7798800
	less value of Wheelrim and Axle			5850000
	cost of merger			1948800
d-	change in market value	(price after merger-price before merger)*no of shares issued before merger	(30-23.28)*290000	1948800	Decrease in value