4. 7.

EPS, PE and mergers [LO 26.3] The shareholders of Bread Limited have voted in favour of a buyout offer from Butter Limited.

Information about each firm is given here:

1.
Bread’s shareholders will receive one Butter share for every three shares they hold in Bread.
1. What will the EPS of Butter be after the merger? What will the PE ratio be if the NPV of the acquisition is zero?
2. What must Butter feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover.

Transcribed Image Text:

Bread Butter Price-earnings ratio 6.35 12.7