Transnational Corporation of Nigeria. During the 1960s, many conglomerates were created by firms that were enjoying a high price/earnings ratio (P/E). These firms then used their highly valued stock to acquire other firms that had lower P/E ratios, usually in unrelated domestic industries. Conglomerates went out of fashion during the 1980s when their P/E ratios significantly declined, thus, making it more difficult to find other firms with lower P/E ratios to acquire. During the 1990s, the same acquisition strategy was possible for firms located in countries where high P/E ratios were common compared to firms in other countries where low P/E ratios were common. Consider the two hypothetical firms shown in the following table:

Transnational Corporation of Nigeria wants to acquire Julius Berger Nigeria Plc. It offers 7,500,000 shares of Transnational Corporation of Nigeria, with a current market value of 300,000,000 and a 12%

premium on Julius Berger Nigeria Plc’s shares, for all of Julius Berger’s shares.

a. How many shares would Transnational Corporation of Nigeria have outstanding after the acquisition of Julius Berger?

b. What would be the consolidated earnings of the combined Transnational Corporation of Nigeria and Julius Berger Nigeria Plc?

c. If market continues to capitalize Transnational Corporation of Nigeria’s earnings at a P/E ratio of 13, what would be the new market value of Transnational Corporation of Nigeria?

d. What would be the new earnings per share of Transnational Corporation of Nigeria?

e. What would be the new market of a share of Transnational Corporation of Nigeria?

f. How much would Transnational Corporation of Nigeria’s stock price increase?
g. Assume that the market takes a negative view of the acquisition and lowers Transnational Corporation of Nigeria’s P/E ratio to 8. What would be the new market price per share of stock?
What would be its percentage loss?