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

Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 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?

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)?

c. What will the price-earnings ratio of the postmerger firm be if the market correctly analyzes the transaction?

d. If there are no synergy gains, what will the share price of Firm A be after the merger? What will the price-earnings ratio be? 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? Explain.

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Firm A $4,350 1,600 43 Firm B Total earnings $1,300 Shares outstanding Price per share 400 47