Merger decision At the end of 2012, Lake Industries had 80,000 shares of common stock outstanding and had earnings available for common of $160,000. Butler Company, at the end of 2012, had 10,000 shares of common stock outstanding and had earned $20,000 for common shareholders. Lake’s earnings are expected to grow at an annual rate of 5%, and Butler’s growth rate in earnings should be 10% per year.
a. Calculate earnings per share (EPS) for Lake Industries for each of the next 5 years (2013–2017), assuming that there is no merger.
b. Calculate the next 5 years’ (2013–2017) earnings per share (EPS) for Lake if it acquires Butler at a ratio of exchange of 1.1.
c. Compare your findings in parts a and b, and explain why the merger looks attractive when viewed over the long run.