Problem 26-10 Effects of a Stock Exchange [LO3]

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

	Firm A			Firm B
Total earnings	$	2,200		$	1,100
Shares outstanding		1,000			250
Price per share	$	37		$	41

Assume that Firm A acquires Firm B via an exchange of stock at a price of $43 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

EPS

$

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 priceearnings ratio does not change)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Price per share

$

c.	What will the priceearnings ratio of the postmerger firm be if the market correctly analyzes the transaction? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Priceearnings ratio

times

d-1	If there are no synergy gains, what will the share price of A be after the merger? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Price per share

$

d-2	What will the priceearnings ratio be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Priceearnings ratio

times

d-3

What does your answer for the share price tell you about the amount A bid for B? Was it too high? Too low?

	Too high
	Too low