2. 10.

Effects of a share exchange [LO 26.3] Consider the following premerger information about Firm A and Firm B:

Assume that Firm A acquires Firm B via an exchange of shares at a price of $49 for each of B’s shares. Both Firm A and Firm B have no debt outstanding.
1. What will the earnings per share (EPS) of Firm A be after the merger?
2. What will Firm A’s price per share be after the merger if the market incorrectly analyses this reported earnings growth (that is, the price-earnings ratio does not change)?
3. What will the price-earnings ratio of the post-merger firm be if the market correctly analyses the transaction?
4. If there are no synergy gains, what will the share price of Firm 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 Firm A bid for Firm B? Was it too high? Too low? Explain.

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Firm A Firm B Total earnings $4 350 $1300 Shares outstanding 1600 400 Price per share $ 43 $ 47 S