Graham & Sons wishes to evaluate a proposed merger into the RCN Group. Graham had 2016 earnings of $200,000, has 100,000 shares of common stock outstanding, and expects earnings to grow at an annual rate of 7%. RCN had 2016 earnings of $800,000, has 200,000 shares of common stock outstanding, and expects its earnings to grow at 3% per year.

a. Calculate the expected earnings per share (EPS) for Graham & Sons for each of the next 5 years (2017–2021) without the merger.

b. What would Graham’s stockholders earn in each of the next 5 years (2017– 2021) on each of their Graham shares swapped for RCN shares at a ratio of (1) 0.6 and (2) 0.8 share of RCN for 1 share of Graham?

c. Graph the premerger and postmerger EPS figures developed in parts a and b with the year on the x-axis and the EPS on the y-axis.

d. If you were the financial manager for Graham & Sons, which would you recommend from part b, (1) or (2)? Explain your answer.