31 Effects of an Equity Exchange Consider the following pre-merger information about firm A and firm B:

Firm A Firm B Total earnings (DKr) 900 600 Shares outstanding 550 220 Price per share (DKr) 40 15 Assume that firm A acquires firm B via an exchange of equity at a price of DKr20 for each share of B’s equity.

Both A and B have no debt outstanding.

(a) What will the earnings per share, EPS, of firm A be after the merger?

(b) 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)?

(c) What will the price–earnings ratio of the post-merger firm be if the market correctly analyses the transaction?

(d) If there are no synergy gains, what will the share price of 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 A bid for B? Was it too high? Too low? Explain.