Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

At the beginning of the year Giant Inc.'s management is considering making an offer to buy Micro Corporation. Micro's projected operating income (EBIT) for the

At the beginning of the year Giant Inc.'s management is considering making an offer to buy Micro Corporation. Micro's projected operating income (EBIT) for the current year is $33.0 million, but Giant believes that if the two firms were merged, it could consolidate some operations, reduce Micro's expenses, and raise its EBIT to $38.0 million. Neither company uses any debt, and they both pay income taxes at a 25% rate. Giant has a better reputation among investors, who regard it as very well managed and not very risky, so its stock has a P/E ratio of 12 versus a P/E of 10 for Micro. Since Giant's management would be running the entire enterprise after the merger, investors would value the resulting corporation based on Giant's P/E. If Micro has 10 million shares outstanding, by how much should the merger increase its share price, assuming all of the synergy will go to its stockholders? Do not round your intermediate calculations.

a. $9.45
b. $5.70
c. $12.60
d. $3.75
e. $4.50

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles Of Finance

Authors: PanOpen+OpenStax

1st Edition

1951283260

More Books

Students also viewed these Finance questions

Question

Is Multiple Sclerosis hereditary?

Answered: 1 week ago