Problem 21-8 Mergers Gains (LO2)

Acquiring Corp. is considering a takeover of Takeover Target Inc. Acquiring has 22 million shares outstanding, which sell for $20 each. Takeover Target has 11 million shares outstanding, which sell for $18 each. The merger gains are estimated at $33 million.

If Acquiring Corp. has a price-earnings ratio of 16 and Takeover Target has a P/E ratio of 12, what should be the P/E ratio of the merged firm? Assume in this case that the merger is financed by an issue of new Acquiring Corp. shares. Takeover Target will get one Acquiring share for every two Takeover Target shares held.