Question

Question 6 Byder plc is considering a possible acquisition of Targetty plc. You have been asked to evaluate the merits of the proposed merger. Here are the data on the two companies before the acquisition. Targetty Byder Shares outstanding 1,000m 5,000m P/E ratio 10 2 Expected EPS 0.5 3 Byder has valued the synergies from the merger as being £2,500m. (a) If Byder wishes to finance the acquisition with shares in the merged firm, what is the maximum number of shares it would be willing to offer to Targetty's shareholders? (7 marks) (b) What would be the consequences of such a bid on expected earnings per share of Byder if we assume that the synergies will lead to an increase in

all information is given?

Answer 1

Answer to a:
Exchange Ratio Based on EPS
Exchange Ratio	=	EPS of Targetyy
		EPS of Byder
	=	0.5
		3
	=	0.16667
Maximum Number of Shares of Byder Co to Shareholders of Targetty Co	=	Shares of Byder Co * Exchange Ratio
	=	5000m*0.16667
	=	833m Shares
Answer to b:
Expected Earnings	=	Current Earnings + Synergies
	=	(5000m*3) + 200m
	=	15200m
Total No of Shares	=	5000+833
		5833m Shares
Expected EPS	=	Expected Earnings
		Total Shares
	=	15200m
		5833m
	=	2.61
EPS will Decrease if Merged with Targetty of Byder