The Agnes Co. is considering the acquisition of the Bilko Co. Agnes projects that earnings next year will be $500. Agnes has 1000 shareholders and a P/E ratio of 10. Bilko projects that earnings next year will be $200. Bilko has 2000 shareholders and a P/E ratio of 15. If the acquisition is completed the new Agnes-Bilko (AB) Co. earnings are expected to be $800 (Note: the earnings of AB is not the sum of A and B).

a. At what exchange ratio (ER) will the old Agnes shareholders suffer 15% dilution in EPS?

b. At what ER will the old Bilko shareholders gain 10% in EPS?

c. If the actual ER is .30 and the new AB has a P/E ratio of 15, what will be the total value of the new AB?