Question

1. Excalibur Enterprises is a merger target. King Arthur Corp. has sufficient but unissued shares of stock to carry out the proposed merger. Listed below is financial data on the involved corporations: Item King Arthur Excalibur Sales $500,000,000 $50,000,000 Earnings Available for Common Stock $40,000,000 $3,740,000 # of shares of Common Stock Outstanding 5 million 1,000,000 Market Price Per Share $64 $24 Dividends Per Share $3.00 $1.00 Earnings Per Share $8.00 $3.74 a. Calculate the exchange ratio if King Arthur offers Excalibur stockholders a 20% premium over Excalibur's current market price. b. What is the effective price of Excalibur as a result of the merger? (Based on the merger what is the $ value of a share of Excalibur stock? C. What will be the post-merger earnings per share if the exchange ratio is .4 shares of Excalibur for each share of King Arthur? Assume post-merger earnings are $43,740,000.

Answer 1

a]

Exchange ratio = market price of Excalibur share * (1 + premium %) / market price of King Arthur share

Exchange ratio = $24 * (1 + 20%) / $64

Exchange ratio = 0.45

b]

Effective price = market price of King Arthur share * Exchange ratio

Effective price = $64 * 0.45 = $28.80

c]

Post-merger EPS = post-merger earnings / total shares outstanding after merger

total shares outstanding after merger = number of King Arthur shares outstanding before merger + (number of Excalibur shares outstanding before merger * exchange ratio)

total shares outstanding after merger = 5,000,000 + (1,000,000 * 0.4)

total shares outstanding after merger = 5,400,000

Post-merger EPS = $43,740,000 / 5,400,000

Post-merger EPS = $8.10