Maltonese Inc. has 5 million shares outstanding selling at $60 each, and its price-to earningsratio (P/E) is 10. Targeton Corp. has 1.5 million shares outstanding with a market price of $30 each, and its P/E ratio is 6. Maltonese is considering the acquisition of Targeton because it expects that the merger will create $15 million of value.
a. What is the maximum price that Maltonese should pay for one share of Targeton?
b. What would be the P/E ratio of the merged firm if Maltonese issues new shares to finance the acquisition, with Targeton shareholders receiving one Maltonese share for two Targeton shares?