Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction.

1. If RM pays no premium to buy AT, then what is Rearden's price-earnings ratio after the takeover? Would the change in EPS benefit or hurt RMs shareholders?
2. What will be RMs price-earnings ratio after the takeover? What is it before the takeover? What explains the change in the price-earnings ratio?
3. Would you advise Rm to buy AT using cash instead of shares? Would paying cash change the desirability of the deal? Why or why not?