14.11 Acquiring Company is considering the acquisition of Target Company in a share-for-share transaction in which Target Company would receive $50.00 for each share of its common stock. Acquiring Company does not expect any change in its P/E multiple after the merger.

Acquiring Co. Target Co.

Earnings available for common stock $150,000 $30,000 Number of shares of common stock outstanding 60,000 20,000 Market price per share $60.00 $40.00 Using the preceding information about these two firms and showing your work, calculate the following:

a. Purchase price premium. Answer: 25%

b. Share-exchange ratio. Answer: 0.8333

c. New shares issued by Acquiring Company. Answer: 16,666

d. Total shares outstanding of the combined companies. Answer: 76,666

e. Postmerger EPS of the combined companies. Answer: $2.35

f. Premerger EPS of Acquiring Company. Answer: $2.50 g. Postmerger share price. Answer: $56.40, compared with $60.00 premerger h. Postmerger ownership distribution. Answer: Target shareholders = 21.7% and Acquirer shareholders = 78.3%