Exercise

Consider the following information for two all-equity firms, A and B:

Firm A Firm B

Total earnings $3,000 $1,100

Shares outstanding 600 400

Price per share $70 $15

Firm A is acquiring Firm B by exchanging 100 of its new shares for all the shares in B.

1. What is the cost of the merger if the merged firm is worth $63,000? (the number of shares of the merged firm is 600 + 100 =700 shares)

2. What will happen to the Merged Firm's Earning Per Share (EPS)?

3. What will happen to the Merged Firm's Price Earnings Ratio (PER)?

Answers

1/

Value of Merged firm

# of share of Merged firm

Value of share of Merged Firm

# of Exchanged shares

Cost of the merger

2/

Earning Firm A

Earning Firm B

Total Earning

# of share of Merged firm

EPS

3/

Value of share of Merged Firm

EPS

PER