(a) Consider the following premerger information about Firm A and Firm B:

Firm A Firm B

Net Profit $300 $100

Total earnings $1,050 $300

Shares outstanding 1,000 200

Price per share $23 $27

Annual Dividend per Share $0.5 $0.3

Assume that Firm A acquires Firm B via a share swap. In particular, Firm A will pay $27 (in Firm As new shares) for each share of Firm B stock. Both A and B have no debt outstanding. The merger has a zero NPV and the earnings of the combined firm will be the sum of the earnings of the two firms.

1. How many shares of Firm A are needed?
2. What will the earnings per share (EPS) of the combined firm be after the merger?
3. What is the price-earnings ratio of the combined firm?

(5 marks)

(b) Describe what are the defensive tactics that a target firm can use in takeovers. Is the use of these tactics beneficial or detrimental to the target firm shareholders?