Modo Unico Acquisition. During the $1960$s$,$ many conglomerates were created by firms that were enjoying a Data table

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high price$/$earnings ratio $($P$/$E$).$ These firms then used their highly valued stock to acquire other firms that had

lower P$/$E ratios, usually in unrelated domestic industries. Conglomerates went out of fashion during the $1980$s when

they lost their high $\frac{P}{E}$ ratios, thus making it more difficult to find other firms with lower $\frac{P}{E}$ ratios to acquire.

During the $1990$ s$,$ the same acquisition strategy was possible for firms located in countries where high $\frac{P}{E}$ ratios were

common compared to firms in other countries where low P$/$E ratios were common. Consider the hypothetical firms in

the pharmaceutical industry shown in the following table:

Modern American wants to acquire ModoUnico. It offers $5\frac{,}{b}ar(500),000$ shares of Modern American, with a current market

value of $$220,000,000$ and a $10\%$ premium on ModoUnico's shares, for all of ModoUnico's shares.

a$.$ How many shares would Modern American have outstanding after the acquisition of ModoUnico?

b$.$ What would be the consolidated earnings of the combined Modern American and ModoUnico?

c$.$ Assuming the market continues to capitalize Modern American's earnings at a P$/$E ratio of $40,$ what would be the

new market value of Modern American?

d$.$ What would be the new earnings per share of Modern American?

e$.$ What would be the new market value of a share of Modern American?

f$.$ How much would Modern American's stock price increase?

g$.$ Assume that the market takes a negative view of the acquisition and lowers Modern American's P$/$E ratio to $30.$

What would be the new market price per share of stock? What would be its percentage loss?