Consider the following premerger information about Firm A and Firm B:

Firm A Firm B

Total Earnings $3,150 $1,000

Shares Outstanding 1,500 300

Price per share $43 $47

Assume that Firm A acquires Firm B via exchange of stock price of $49 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?

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)?

c) What will the price earnings ratio of the post merger firm be if the market correctly analyzes the transaction?

d) If there are no synergy gains, what will the 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?