Question
1. The Blue Oil Corporation and the Grey Plastics Company have agreed to a merger. The Grey Plastics stockholders will receive 0.75 shares of Blue
1. The Blue Oil Corporation and the Grey Plastics Company have agreed to a merger. The Grey Plastics stockholders will receive 0.75 shares of Blue for each share of Grey held. Assume that no synergistic benefits are expected.
a. Complete the following table: Blue Oil Grey Plastics Combined Companies Sales (millions) $500 $125 ________ Earnings after taxes (millions) $ 60 $ 13 ________ Common shares outstanding (millions) 16 4 ________ Earnings per share $ 3.75 $ 3.25 ________ Common stock (price per share) $ 41.25 $ 26 ________ Price/earnings ratio ________ ________ 10.0
b. Calculate the premium percentage received by the Grey stockholders. Assume both that immediate synergistic earnings of $3 million per year will occur as a result of the merger and that the P/E ratio of the combined companies is 10.5.
c. Rework part a.
d. Rework part b.
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