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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
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.
- 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?
- 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?
- 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?
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