The accretion or dilution to EPS

Company A is looking to acquire Company B at a 20% premium above Company B's current share price. You have been assigned to determine the accretion or dilution to Company A's earnings. One-third of the uses will be funded in debt. Company's B's net debt will be retired upon acquisition. Some additional key assumptions are noted next slide:

Key Market Data

Company A Company B

Price $12 $5

Shares 250MM 150MM

Options 15MM 50MM

@ Strike Price $15 $4

Balance Sheet Items:

Company A has $200MM LTD, $50MM STD, $0MM cash, and a book value of $1.5Bn.

Company B has $150MM LTD, $10MM STD, $5MM cash, and a book value of $800MM.

Income Statement Items:

Company A EBIT is expected to be $200MM.

Company B EBIT is expected to be $50MM.

Key Assumptions:

7% interest on LTD

5 % interest on STD

1 % interest income on investments

40% tax rate

1% of total EBIT cost savings

Intangible asset allocation is 25 '% and amortized over 15 years.

Fees 1% of purchase price

Show your work done and answer the following questions:

a) what is the purchase price?

b) how much Company A has to borrow to acquire Company B?

c) what is the company A interest expense?

d) What is the net income of company A?

e) what is the EPS of Company A?

f) what is the pro forma adj. synergies?

g) what is the pro forma adj. amortization?

h) what is the pro forma total interest expenses?

i) what is the pro forma net income?

j) what is the pro forma EPS?

Reference: Methods of Valuation for Mergers and Acquisitions