Set A as 1

1. This is a problem that illustrates how differential P/E games were played during the third wave of acquisitions. World Enterprises is acquiring the Wheelrim and Axle Company. There are no gains from merging. In exchange for Wheelrim and Axle shares, World Enterprises issues just enough of its own shares to ensure earnings per share of $(2.65 +.03 x A) in the merged firm. Here are the facts you are given: Merged Firm $(2.65 +.03 x A) World Enterprises $2 $40 20 100,000 $200,000 $4,000,000 Earnings per share Price per share Price-earnings ratio Number of shares Total earnings Total market value Wheelrim and Axle $2.50 $25 10 200,000 $500,000 $5,000,000 20 a. Complete the above table for the merged firm, assuming that investors expect the P/E ratio of the combined firm to remain at 20%. b. How many shares of World Enterprises are exchanged for each share of Wheelrim and Axle? C. Find the EPS and price per share for each firm after the acquisition (with the values after based on the pre-acquisition shares). d. What should be the price per share and price/earnings ratio of the combined firm