Graham & Sons wishes to evaluate a proposed merger into the RCN Group. Graham had 2012 earnings

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Graham & Sons wishes to evaluate a proposed merger into the RCN Group. Graham had 2012 earnings of $200,000, has 100,000 shares of common stock outstanding, and expects earnings to grow at an annual rate of 7%. RCN had 2012 earnings of $800,000, has 200,000 shares of common stock outstanding, and expects its earnings to grow at 3% per year.

a. Calculate the expected earnings per share (EPS) for Graham & Sons for each of the next 5 years (2013–2017) without the merger.

b. What would Graham’s stockholders earn in each of the next 5 years (2013–2017) on each of their Graham shares swapped for RCN shares at a ratio of (1) 0.6 and (2) 0.8 share of RCN for 1 share of Graham?

c. Graph the premerger and post merger EPS figures developed in parts a and b with the year on the x axis and the EPS on the y axis.

d. If you were the financial manager for Graham & Sons, which would you recommend from part b, (1) or (2)? Explain your answer.


Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
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Principles Of Managerial Finance

ISBN: 978-0136119463

13th Edition

Authors: Lawrence J. Gitman, Chad J. Zutter

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