Question

You are given the following facts: World Enterprises (A) Wheelrim& Axle (B) Merged Company (AB) EPS $2.4 3.20 Price per share $48 P/E 20 12 number of shares 120,000 240,000 Total Earnings $288,000 $720,000 Total market value $5,760,000 $8,640,000

Answer 1

EPS of the Merged Company(AB) = $3.20

Total Earning of AB = Earnings of A + Earnings of B

=$ 288,000 + $ 720,000

= $ 1008,000

No. of Shares of AB = Total Earnings / EPS

= $ 1008,000/ $ 3.20

= 315, 000 shares

Since, there is no gain in merger, Total market Value of Merged Company (AB) = Market Value of A + Market Value of B

= $ 5760,000+$8640,000

= $ 14400,000

Price per Share of Merged Company (AB)= Total Market Value/ No. of Shares

= $ 14400,000/315000 shares

= $ 45.71 per share

P/E Ratio= MPS/EPS

= $ 45.71/$3.20

= 14.28 times

I). Price per Share= $45.71 per share

II). P/E Ratio = 14.28 times

III). No. of Shares = 315,000 shares

IV). Total earnings = $ 1008,000

V). Total Market value= $ 14400,000

d). Market Value of World Enterprises Shares before Merger = $5760,000

As World Enterprises issued enough of its own shares to ensure $ 3.20 EPS objective.Its own shares in Merged Company (AB) remains the same.

Market Value of World Enterprises Shares after Merger = Share price of Merged Company * No. of shares of World Enterprises.

= $45.71*120000 shares

= $5485,200

change in Market Value of World enterprises Shares = Market Value before Merger- Market Value after Merger

= $ 5760,000- $ 5485,200

= $ 274,800

So, World Enterprises Market Value of shares decreased after merger.