Question

Consider the following premerger information about Firm A and Firm B:

	Firm A			Firm B
Total earnings	$	2,000		$	1,000
Shares outstanding		1,100			250
Price per share	$	39		$	43

Assume that Firm A acquires Firm B via an exchange of stock at a price of $45 for each share of B's stock. Both Firm A and Firm B have no debt outstanding.

a.	What will the earnings per share (EPS) of Firm A be after the merger? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b.	What will Firm A's price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price-earnings ratio does not change)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
c.	What will the price-earnings ratio of the postmerger firm be if the market correctly analyzes the transaction? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
d-1.	If there are no synergy gains, what will the share price of Firm A be after the merger? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
d-2.	What will the price-earnings ratio be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
d-3.	What does your answer for the share price tell you about the amount Firm A bid for Firm B? Was it too high? Too low?

Answer 1

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