Zenith Industries is considering the acquisition of the Nadir Corporation in a stock-for-stock exchange. (The expression stock-for-stock

Question:

Zenith Industries is considering the acquisition of the Nadir Corporation in a stock-for-stock exchange. (The expression stock-for-stock exchange means that the common stock of one company is exchanged for the common stock of another.) Assume that no immediate synergistic benefits are expected. Selected financial data on the two companies are shown here:

Zenith Nadir Sales (millions) $500 $100 Earnings after taxes (millions) $ 30 $ 12 Common shares outstanding (millions) 6 2 Earnings per share $ 5 $ 6 Common stock price per share $ 50 $ 40 Dividends per share $ 2 $ 1.50

a. If Zenith is not willing to incur an initial dilution in its earnings per share—

that is, not have the postmerger earnings per share be below $5 per share—

and if Zenith also feels that it will have to offer the Nadir shareholders a minimum of 25 percent over Nadir’s current market price, what is the relevant range of Nadir per-share stock prices with which Zenith is working?

b. Calculate Zenith’s postmerger earnings per share if the Nadir stockholders accept an offer by Zenith of $50 a share in a stock-for-stock exchange.LO1

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