Theta Co exists in a world where financial markets are inefficient. In this world, share prices are
Question:
Theta Co exists in a world where financial markets are inefficient. In this world, share prices are determined by the following formula: Price = EPS / (r – g). Market participants in this world assume that the growth rate, g, is the most recent earnings per share growth. In other words, these participants assume that the most recent EPS growth will continue in perpetuity.
Theta’s EPS is $8 per share and its shares trade at $200 per share. Theta has 8 million shares outstanding. Theta’s EPS will not grow organically by itself this year, and Theta decides to acquire Iota Co to grow its EPS instead. Theta offers Iota shareholders 1.5 Theta shares for each Iota share. Iota Co’s EPS is $15 per share, its shares trade at $150 per share, and Iota has 2 million shares outstanding. There are no synergies to this acquisition. The discount rate for Theta and Iota is 12%.
What is Theta’s share price after achieving EPS growth through the acquisition?
Managing Business Ethics Making Ethical Decisions
ISBN: 9781506388595
1st Edition
Authors: Alfred A. Marcus, Timothy J. Hargrave