Acquirer, Inc. (A) is considering two possible acquisitions, neither of which promises any enhancements or synergistic benefits. T1 is a poorly performing firm in a declining industry with a price-to- earnings ratio of 10 times. T2 is a high-growth communications company with a price-to-earnings ratio of 40 times. Acquirer is interested in making any acquisition that increases its current earnings per share. All of Acquirer's acquisitions are exchange-of- share mergers.

a. Calculate the maximum percentage premium Acquirer can afford to pay for T1 and T2 by replacing the question marks in the following 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 Eamings after tax ($ millions) Price-to-earnings ratio (x) Market value of equity ($ millions) ? A T1 A+ T1 T2 A+ T2 $2 $1 $3 $1 $3 30 10 40 ? ? ? 1 1 1 ? 2 1 2 1 2 ? ? ? Maximum new shares issued (millions) ? ? Value of new shares issued ($ millions) Maximum acquisition premium (%) ? ? ? Number of equity shares (milions) Earnings per share (S) Price per share AppendixLO1