Question

The following information is for two all equity companies, Cathay Pacific and Hong Kong Airline:

	Cathay Pacific	Hong Kong Airline
Price per share	$50	$10
Total earnings	$2,100,000	$880,000
Share outstanding	1,400,000	800,000

Cathay Pacific is planning to acquire Hong Kong Airline by exchanging 200,000 of its new shares for all the shares in Hong Kong Airline. The synergy from the merger, as estimated by Morgan Stanley, is worth $18,000,000.

Answer the following questions.

A .What is the actual cost of the acquisition?

B .Calculate the EPS and P/E of Cathay Pacific before and after the acquisition. Based on the changes in these two figures, comment on the decision to carry out the acquisition.

C .Regardless of your findings in (b), people have always said that mergers and acquisitions are advantageous. Please provide valid explanations to support this argument from the perspective of revenue enhancement and cost reduction.

Please help!!!!! thank you very much

Answer 1

a)

Actual cost of acquisition

=

no. of shares issued * market price

=

200,000*$50

=

$10,000,000

B)

Calculation of EPS

Before acquisition

After acquisition

1)

Earnings

2,100,000

2,100,000+18,000,000=20,100,000

2)

totalno. Of shares

1,400,000

1,400,000+200,000=1,600,000

EPS(1/2)

$1.5

$12.5625

Comment-the firm has hugely benefited from these acquisition as it synergy benefits has largely increased the EPS of the firm

C)

Two companies can merge to form one company that is capable of producing more revenue than either could have been able to independently, or to create one company that is able to eliminate or streamline redundant processes, resulting in significant cost reduction

If two companies go through revenue synergy, they happen to sell more products.

Cost synergy allows two companies to reduce costs as a result of the merger or the acquisition

Cost synergy may also result from when one of the companies involved in the merger has proprietary technology that would benefit the other company