Consider the following premerger information about Firm A and Firm B:

Assume that Firm A acquires Firm B via an exchange of stock at a price of $18 for each share of B€™s stock. Both A and B have no debt outstanding.

a. What will the earnings per share, EPS, of Firm A be after the merger?

b. What will Firm A€™s price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price€“earnings ratio does not change)?

c. What will the price€“earnings ratio of the postmerger firm be if the market correctly analyzes the transaction?

d. If there are no synergy gains, what will the share price of A be after the merger? What will the price€“earnings ratio be? What does your answer for the share price tell you about the amount A bid for B? Was it too high? Too low? Explain.

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Firm A Firm B Total earnings Shares outstanding Price per share $700 300 $ 60 17 $2,100 900