Pharma Acquisitions. The price/earnings ratio (P/E)

is one of the tools used to compare companies in the same sector. A high P/E ratio means that investors pay more for each Swiss franc of net income, especially if they believe that it has future potential. Due to high research and development expenses incurred by pharmaceutical firms, their P/E is usually higher than those of other industries.

SmallPhar and EuroPhar are hypothetical pharmaceutical firms registered on the Swiss Exchange in Zurich. EuroPhar is considering acquiring SmallPhar

EuroPhar wants to acquire SmallPhar. It offers 2,500,000 shares of EuroPhar, with a current market value of CHF75,000,000 and a 7.14% premium on SmallPhar’s shares, for all of SmallPhar’s shares.

a. What is the total number of outstanding shares that EuroPhar will have after acquiring SmallPhar?

b. Calculate the consolidated earnings after the acquisition.

c. If the P/E ratio after the capitalization stays at 20, what would be the new market value of EuroPhar?

d. What would be EuroPhar’s new EPS?

e. What is the new market price of EuroPhar’s share?

f. By how much would EuroPhar’s stock price increase?
g. Assume that the market takes a negative view of the acquisition and lowers EuroPhar’s P/E ratio to 10. What would be the new market price per share of stock? What would be its percentage loss?

Transcribed Image Text:

Company SmallPharw EuroPhar Number Market Value P/E Ratio of Shares per Share Earnings EPS Total Market Value 35 2,000,000 CHF 35 CHF 2,000,000 CHF 1.0 CHF 70,000,000 20 10,000,000 CHF 30 CHF 15,000,000 CHF 1.5 CHF 300,000,000