Consider the following premerger information about Firm A and Firm B

    

	Firm A	Firm B
Total earning	$2,100	$600
Shares outstanding	1,000	200
Price per share	$43	$47

Assume that Firm A acquires Firm B via an exchange of stock at a price of $35 for each share of B’s stock. Both A and B have no debt outstanding.

a. What will the earnings per share (EPS) of Firm A be after the merger?

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b. What will Firm A’s price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price-earnings ratio does not change)?

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c. What will the price-earnings ratio of the postmerger firm be if the market correctly analyzes the transaction?

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d. If there are no synergy gains, what will the share price of A be after the merger? What will the price-earnings ratio be? What does your answer for the share price tell you about the amount A bid for B? Was it too high? Too low? Explain.