# Question

Consider the following pre-merger information about firm A and firm B:

Assume that firm A acquires firm B via an exchange of stock at a price of $22 for each share of B’s 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 A’s 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.

Assume that firm A acquires firm B via an exchange of stock at a price of $22 for each share of B’s 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 A’s 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.

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