Problem 4: Effects of a Stock Exchange Consider the following pre-merger information about Firm A and Firm B: Firm A Firm B Total earnings $ 3,150 $ 1,000 Shares outstanding $ 1,500 $ 300 Price per share $ 43 $ 47 Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 for each share of B's stock. Both A and B have no debt outstanding. a) What will the earnings per share (EPS) of Firm A be after the merger? b) What will Firm A's price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price-earnings ratio does not change)? c) What will be the price-earnings ratio of the postmerger firm if the market correctly analyzes the transaction (the market price adjusts to reflect the new price-earnings ratio)? d) If there are no synergy gains, what will the share price of A be after the merger? What will the price-earnings ratio be? e) What does this tell you about the amount A bid for B? Was it too high or too low? Explain. Total earnings Shares outstanding Price per share Acquisition price Output Area: Firm A Firm B Cost $ Shares given up by A #DIV/0! a. EPS #DIV/0! b. Old P/E #DIV/0! New price #DIV/0! C. P/E #DIV/0! d. Price P/E #DIV/0! #DIV/0! e. At the current acquisition price, this is a Chan 26 #1 Chan 26 #2 | Chan 26 #3 Chap 26 #4