Question

Rearden Metal has earnings per share of $2. It has $10 million shares outstanding and is trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction.

If Rearden pays no premium to buy Associated Steel, then what is Rearden's earnings per share after the merger?

Answer 1

Rearden's earnings per share after the merger

Total earnings after the merger

Total Earnings of Rearden Metal = Earnings per share x Number of shares outstanding

= 10 Million shares x $2 per share

= $20 Million

Total Earnings of Associated Steel = Earnings per share x Number of shares outstanding

= 4 Million shares x $1.25 per share

= $5 Million

Therefore, the total earnings after the merger = Total Earnings of Rearden Metal + Total Earnings of Associated Steel

= $20 Million + $5 Million

= $25 Million

Total Number of shares outstanding after the merger

Total Number of shares outstanding after the merger = Number of shares of Rearden Metal + [Number of shares of Associated Steel x (Share Price of Associated Steel / Share Price of Rearden Metal)]

= 10 Million Shares + [4 Million Shares x ($15/$20)]

= 10 Million Shares + 3 Million Shares

= 13 Million Shares

Therefore, the Rearden's earnings per share after the merger = Total earnings after the merger / Total Number of shares outstanding after the merger

= $25 Million / 13 Million shares outstanding

= $1.92 per share

“Hence, the Rearden's earnings per share after the merger would be $1.92 per share”