Question

Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2,1 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. a. If you pay no premium to buy TargetCo, what will be your earnings per share after the merger? b. Suppose you offer an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy TargetCo. What will be your earnings per share after the merger? c. What explains the change in earnings per share in (a)? Are your shareholders any better or worse off? d. What will be your price-earnings ratio after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo's premerger P/E ratio? # of new shares you have to issue total shares after merger Total earnings from TargetCo Total earnings from Aquirer Total earnings after merger EPS after merger # of new shares you have to issue total shares after merger EPS after merger Value of the aquirer pre-merger Value of the target pre-merger Total equity value after merger Stock price after merger P/E ratio after merger P/E ratio of aquirer pre-merger P/E ratio of target pre-merger

Answer 1

As weare payng no premium to Targe Co. 4 no expecred Synergies From the there ave +ransaction, thar means we exchanging Shares are at markCt Price. marker Price of Torger Co Marka Price of fy Co Exchange Ratio $25 =O.625 Calculation OF Eaming Per Share CEPS Afer mager Particulars Net Eanings y Company $4l000oo0 $400000 Tarqet Co. $2X10 0000 $200OD00 = EPSX No. oShares $6000 000 B No: of Shares 1od0000 y Co. Rahiox No-Of Shares -Exchange Torget Co. 62S000 162S000 =0625XI000000 $3-69 Per Share After Merger gEaning CAIB

offer Price to Targe Co Marker Pice +20*). Premum $25 +20% $30 Exchangs Raho Marke oerpice of Torgtko Morlker Price of my Co $ 30 O75 Colaulabion of EPS After merger Net Eanings TAs Calcula ed in (a) (A) above $6000 000 B No.DF Shares my Co. Target Co. Exchange Ravio xNo ofShars 1000 000 MOZSX1000 000 7S00 00 7S0000 Per Share After Merger $3.43 a Earning Cmy Company's EPs before merger is $4 affer merger is 3.69 in case la) 4 $3.43 in Caselb). So is lower after merger. However Target Co.s EPS before merger is $2.f after merger it is $2-31 (EPS Bevt merger xexchange ratio AFFET $360.62s) in case (a)

PAGE: DATE: 2 S7($3.43x D.7S) in CAse of (b) Soit is higher after merger Calaulati on of P/E Ratio Partialars AFter Before merger Targer merger No Premium Case Ca) my Co Co. 3-69 4p EPS B Mark et Pri ce Per Share 25 o-84 P/ERatio 8/A 12-SO lO