Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is planning to acquire Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Both companies have no debt in their capital structure.

A. Rearden Metal estimates that there are no expected synergies from the takeover. Rearden Metal will pay for Associated Steel by issuing new shares. If Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 30% premium to buy Associated Steel.

(i) What is the price per share of the combined firm after the takeover? The answer is 10.40.

(ii) What is the price per share of Associated Steel immediately after the announcement?