Question: Consider a merger between two companies, 1 and 2, that is carried out by an exchange of stock. Company 1 is the acquirer. Each

Consider a merger between two companies, 1 and 2, that is carried

Consider a merger between two companies, 1 and 2, that is carried out by an exchange of stock. Company 1 is the acquirer. Each company has 100 shares. EPS1 = $1, EPS2 = 2 (both received at the end of the year). Assume for simplicity that dividend = earnings. 1 = 1, 2=2.0. RF = 0.07, Risk premium = 0.06. The growth rate is zero. There are no expected synergies in this merger. a. What is the exchange ratio that will leave the price of company 1 unchanged? b. What happens to the EPS of company 1 after the merger? (EPS = earnings per share = total earnings/number of shares.) Should its price change as a result of the change in the EPS, and if so - in what direction?

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