Question
Firm XYZ is considering acquiring Firm ABC. XYZ's shares are currently trading at 25. It has 200,000 shares outstanding and its profits after taxes amount
Firm XYZ is considering acquiring Firm ABC. XYZ's shares are currently trading at 25. It has 200,000 shares outstanding and its profits after taxes amount to 400,000. ABC has 100,000 shares outstanding. Its current market price is 12.50 and its profits after tax 100,000. The merger will be carried out by an equity-for- equity transaction. ABC has agreed to a plan under which XYZ will offer the current market value of ABC's shares. What is the pre-merger earnings per share (EPS) and price-earnings (P/E) ratios of both companies? If ABC's P/E ratio is 8, what is its current market price? What is the exchange ratio? What will XYZ's post-merger EPS be? What must the exchange ratio be for XYZ's that pre- and post-merger EPS to be the same?
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