Consider the following premerger information about Firm A and Firm B Firm A Firm B Total earning
Question:
Consider the following premerger information about Firm A and Firm B
| Firm A | Firm B |
Total earning | $2,100 | $600 |
Shares outstanding | 1,000 | 200 |
Price per share | $43 | $47 |
Assume that Firm A acquires Firm B via an exchange of stock at a price of $35 for each share of B’s stock. Both A and 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 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 A bid for B? Was it too high? Too low? Explain.
Business and Professional Ethics
ISBN: 978-1285182223
7th edition
Authors: Leonard J. Brooks, Paul Dunn