Company A is considering the acquisition by shares of Company B. The following information is also available.

Company A Company B

Present earnings Shs 20,000,000 Shs 5,000,000

Shares 5,000,000 2,000,000

Earnings per share Shs 4 Shs 2.50

Price/earning ratio 16 12

Price of shares Sh 64 Sh 30

Company B has agreed to an offer of Shs 35 a share to be paid in Company A shares.

REQUIRED:

1. Consider the effect of the acquisition to the earnings per share.

2. Comment on the general position of the shareholders in both companies as a result of the acquisition.