Consider the following pre-merger information about firm A and firm B: Assume that firm A acquires firm
Question:
Assume that firm A acquires firm B via an exchange of stock at a price of $22 for each share of Bs stock. Both A and B have no debt outstanding.
a. What will the EPS of firm A be after the merger?
b. What will firm As price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the P/E ratio does not change)?
c. What will the P/E ratio of the post-merger firm be if the market correctly analyzes the transaction?
d. If there are no synergy gains, what will the share price of A be after the merger? What will the P/E ratio be? What does your answer for the share price tell you about the amount A bid for B? Was it too high? Too low? Explain.
Step by Step Answer:
Corporate Finance
ISBN: 978-0071339575
7th Canadian Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Gordon Ro