Acorn bLtd. has earnings per share of $3. It has 10 million shares outstanding and is trading at $35 per share. Acorn is considering buying a target company named Tofu Inc.. Tofu has earnings per share of $1.5, trades at a price per share of $20, and has 3 million shares outstanding. Acorn will pay for Tofu by issuing nes shares. There are no expected synergies from the transaction. Acorn offers an exchange ratio such that, at current pre-announcemnt share prices for both firms, the offer represents a 20% premium to buy Tofu. Assume that once announced, the acquisition will occur with certainty, and all makret participants know this on the announcemnet day. Finacial markets are perfect. 

 

a) what is the exchange ratio offer in the stock swap? what will earnings per share be after the merger? what explains the change in earnigns per share?

 

 b) Compute the price per share of the combined corporation after the merger. Is the acquisition a positive NPV investment for Acorn's shareholders?

 

 c) what is the price per share of Acorn immediately after the announcement? what is the actual premium that Acorn will pay for Tofu? Show clear calculation to take full marks.

Answer rating: 100% (QA)

a Calculation of the exchange ratio offer in the stock swap Given information Acorns earnings per share EPS 3 Acorns shares outstanding 10 million Aco... View the full answer