Consider the following pre-merger information about firm A and Firm B:

Firm AFirm BTotal earningsR900R600Shares in issue500200Price per shareR40R15

Assume that Firm A acquires Firm B via an exchange of shares at a price of R21 for each share of B's shares. Neither A nor B has any debt.

a) What will the earnings per share (EPS) of Firm A be after the merger? (6 Marks)

b) What will firm's A's price per share be after the merger if the market is fooled by this reported earnings growth (this means price/earnings (P/E) ratio doesn't change)? (4 Marks)

c) What will be the new P/E ratio after the merger? (3 Marks)

d) If there are no synergy gains, what will the share price of A be after the merger? What will the P/E ratio be? What does your answer for the share price tell you about the amount A bid for B (4 Marks)