Under the following scenarios, calculate the merger premium and the exchange ratio:
a. The acquired financial firm’s stock is selling in the market today at $14 per share, while the acquiring institution's stock is trading at $20 per share. The acquiring firm’s stockholders have agreed to extend to shareholders of the target firm a bonus of $5 per share. The acquired firm has 30,000 shares of common stock outstanding, and the acquiring institution has 50,000 common equity shares. Combined earnings after the merger are expected to remain at their premerger level of $1,625,000 (where the acquiring firm earned $1,000,000 and the acquired institution $625,000). What is the postmerger EPS?
b. The acquiring financial-service provider reports that its common stock is selling in today’s market at $30 per share. In contrast, the acquired institution’s equity shares are trading at $20 per share. To make the merger succeed, the acquired firm’s shareholders will be given a bonus of $2.00 per share. The acquiring institution has 120,000 shares of common stock issued and outstanding, while the acquired firm has issued 40,000 equity shares. The acquiring firm reported premerger annual earnings of $850,000, and the acquired institution earned $150,000. After the merger, earnings are expected to decline to $900,000. Is there any evidence of dilution of ownership or earnings in either merger transaction?