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Consider the following premerger information about Firm A and Firm B: ...................................................Firm A................ Firm B Total earnings ..................................$2,100................... $750 Shares

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

...................................................Firm A................ Firm B

Total earnings ..................................$2,100................... $750

Shares outstanding................................ 900..................... 300

Price per share ....................................$ 60.................... $ 12

Assume that Firm A acquires Firm B via an exchange of stock at a price of $13 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 (i.e., the price-earnings ratio does not change)?

c. What will the price-earnings 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 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.


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Related Book For  answer-question
Corporate Finance

Corporate Finance

ISBN: 978-0077861759

11th edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

See More Books
Question Details
Chapter # 29- Mergers, Acquisitions, and Divestitures
Section: Questions and Problems
Problem: 10
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Question Posted: June 22, 2017 10:12:41
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