Data for Hani Company and Mani Services are given in the following table. Hani Company is considering merging with Mani by swap­ ping 1.25 shares of its stock for each share of Mani stock. Hani Company expects its stock to sell at the same price/earnings (P/E) multiple after the merger as before merging.
Item Hani Company Mani Services
Earnings available for common stock...................US$225,000.......................US$50,000
Number of shares of common stock outstanding.............90,000............................15,000
Market price per share...........................................US$ 45...........................US$ 50
a. Calculate the ratio of exchange in market price.
b. Calculate the earnings per share (EPS) and price/earnings (P/E) ratio for each company.
c. Calculate the price/earnings (P/E) ratio used to purchase Mani Services.
d. Calculate the post merger earnings per share (EPS) for Hani Company.
e. Calculate the expected market price per share of the merged firm. Discuss this result in light of your findings in part a.