Question

2. Whipple Industries is interested in acquiring Charmin'. Whipple has sufficient authorized but unissued shares to carry out the proposed merger. The exchange ratio is .4 and financial data on these companies is listed below: Item Whipple Charmin Sales $150,000,000 $30,000,000 Earnings available for Common Stock $25,000,000 $3,500,000 # of shares of common Sock Outstanding 8,000,000 2,000,000 Earnings per Share $3.13 $1.75 Dividends per Share $1.50 $0.75 Market Price Per Share $40.00 $19.50 a. How many new shares of stock will Whipple have to issue to make the proposed merger? b. If the earnings for each firm remain unchanged, what will the post-merger EPS be? C. How much, effectively, has been earned on behalf of each of the original shares of Charmin' Stock? d. How much, effectively, has been earned on behalf of each of the original shares of Whipple stock?

Answer 1

Answers

a. Calculation of number of shares to be issed by Whipple for proposed merger

= Share exchange ratio * No. of shares of Charmin

= 0.4 * 20,00,000

Shares to be issued = 8,00,000

b. Post merger Earning per share (EPS)

Sr. No	Particulars	Amount	Amount
a.	Total earnings after merger i)Whipple ii) Charmin	$2,50,00,000 $35,00,000	$2,85,00,000
b.	Total no. of shares after merger i) Whipple ii) Charmin	80,00,000 8,00,000	88,00,000
c	Post merger EPS (a/b)		$3.24

c. Effect of EPS after merger

Sr. No.	Particulars	Whiiple	Charmin
a.	Pre merges EPS	$3.13	$1.75
b	Post merges EPS	$ 3.24	$ 1.30 ($3.24*0.4=$1.30)
c	Gain or (loss) (b-a)	$ 0.11	$-0.45