Firm A currently sells at a price-earnings (P/E) multiple of 10. The firm has 2 million shares outstanding and sells at a price per share of $40. Firm B has a P/E multiple of 8, has 1 million shares outstanding, and sells at a price per share of $20.

1. What will be the earnings per share of the merged firm AB, if firm A acquires firm B by exchanging one of ABs shares for every two of Firm B? [7 marks]

2. What will happen to As price per share if the merger has no economic gains? What should be the P/E of the merged firm AB? [7 marks]

3. Show that shareholders of neither A nor B realise any change in wealth. [4 marks]

4.Who usually benefits and who usually losses from a typical merger? List and briefly explain the relevant stakeholders. [7 marks]