Procureps, Inc. (P) is considering two possible acquisitions, neither of which promises any enhancements or synergistic benefits. VI is a poorly performing firm in a declining industry with a price-to-earnings ratio of eight times. V2 is a high-growth technology company with a price-to- earnings ratio of 35 times. Procureps is interested in making any ac- quisition that increases its current earnings per share. All of Pro- cureps's acquisitions are exchange-of-share mergers.

a. Calculate the maximum percentage premium Procureps can afford to pay for VI and V2 by replacing the question marks in the fol- lowing table.

b. What do your answers to part

(a) suggest about the wisdom of using "avoid dilution in earnings per share" as a criterion in merger analysis? Company Earnings after tax ($ millions) Price to earnings ratio (x)) Market value of equity ($ millions) Number of equity shares (millions) Earnings per share ($) Price per share Maximum new shares issued (millions) Value of new shares issued (S millions) Maximum acquisition premium [%] P V1 P+ V1 V2 P+V2 $2 $1 $3 $1 $3 30 8 35 ? ? ? 1 1 ? 1 ? 2 1 2 T 2 ? ? ? ? ? ? ? ? ?

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