Target Limited (Target') is considering acquiring Acquired Limited ( Acquired'') . Target has a current earning per share (EPS) of 4.80 while one share in Acquired earns 3.20. Target has a current earning per hare (EPS) of 4.80 while one share in Acquired earns 3.20. Target has 4.3 million shares in issue and the current market value of each share is 38.40. Acquired has 2.1 million shares in issue and the current trading at 44.80. Target estimates that if they acquired Acquired, there will be synergistic benefit amounting to 7.6 million per annum. It is anticipated that the merger does not affect the overall market's assessment of the group. The two parties concerned have agreed that the purchase should be settled through share exchange. one share in Target currently pays a dividend of 2.80 while a share in Acquired currently pays a dividend of 0.80. Target aims to maintain their current dividend payout policy.

Required

Determine the exchange ratio that Target should offer if they want to acquire the total increase in earnings due to the effects of synergy. 

If the exchange ratio is base on market prices, calculate the change in dividend that would accrue to a shareholder that is currently holding 100 shares in Acquired.

Calculate the increase in total market value of the new entity after the merger.

Give five reasons why merger sometimes fail.

Answer rating: 100% (QA)

To determine the exchange ratio that Target should offer to acquire the total increase in earnings due to the effects of synergy we need to calculate ... View the full answer