Effects of a Stock Exchange Consider the following premerger information about Firm A and Firm B :

Firm A Firm B Total earnings $2,100 $700 Shares outstanding 900 300 Price per share $ 60 $ 17 Assume that Firm A acquires Firm B via an exchange of stock at a price of $18 for each share of B ’s stock. 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 analyzes this reported earnings growth (that is, the price–earnings ratio does not change)?

c. What will the price–earnings ratio of the postmerger firm be if the market correctly analyzes 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.