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Problem 2 1 - 5 Mergers and P / E Ratios ( LO 1 ) Castles in the Sand currently sells at a price -

Problem 21-5 Mergers and P/E Ratios (LO1)
Castles in the Sand currently sells at a price-earnings multiple of 10. The firm has 2 million shares outstanding and sells at a price per
share of $30. Firm Foundation has a P/E multiple of 6, has 1 million shares outstanding, and sells at a price per share of $15.
a. If Castles acquires the other firm by exchanging one of Its shares for every two of Firm Foundation, what will be the earnings per
share of the merged firm?
Note: Do not round Intermedlate calculatlons. Round your answer to 2 decimal places.
b. What will be the price per share for Castle?
Note: Do not round Intermedlate calculatlons.
c. What would be Firm Foundation's value of stock post merger?
Note: Do not round Intermedlate calculatlons. Enter your answer In milllons.
c. What should be the P/E of the new firm if the merger has no economic galns?
Note: Do not round Intermedlate calculatlons. Round your answer to 2 decimal places.
e. Calculate Castles' price per share If the market does not reallze that the P/E ratlo of the merged firm ought to differ from Castles'
premerger ratio.
Note: Do not round Intermedlate calculatlons.
f. How are the galns from the merger spllt between shareholders of the two firms if the market is fooled as in part (e)?
Note: Enter your answers In milllons.
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