Your company has earnings per share of

$4.20.

It has

1.5

million shares outstanding, each of which has a price of

$40.80.

You are thinking of buying TargetCo, which has earnings per share of

$2.10,

1.4

million shares, and a price per share of

$25.70.

You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction.

a. If you pay no premium to buy TargetCo, what will be your earnings per share after the merger?

b. Suppose you offer an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a

25%

premium to buy TargetCo. What will be your earnings per share after the merger?c. What explains the change in earnings per share in part

(a)?

Are your shareholders any better or worse off?

d. What will be your price-earnings ratio after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo's premerger P/E ratio?

Question content area bottom

Part 1

a. If you pay no premium to buy TargetCo, what will be your earnings per share after the merger?

EPS after the merger is

$enter your response here.

(Round to the nearest cent.)

Part 2

b. Suppose you offer an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a

25%

premium to buy TargetCo. What will be your earnings per share after the merger?If you pay a

25%

premium to buy TargetCo, the EPS after the merger is

$enter your response here.

(Round to the nearest cent.)

Part 3

c. What explains the change in earnings per share in part

(a)?

(Select the best choice below.)

A.Earnings per share always decline if the firm issues new shares to pay for a merger.

Earnings per share always decline if the firm issues new shares to pay for a merger.

B.Earnings per share declines because TargetCo has a higher price dash earnings ratio than your firm.

Earnings per share declines because TargetCo has a higher price-earnings ratio than your firm.

C.Earnings per share declines because you are overpaying for TargetCo.

Earnings per share declines because you are overpaying for TargetCo.

Part 4

Are your shareholders any better or worse off?(Select the best choice below.)

A.

In this case, your shareholders are neither worse nor better off.

B.

In this case, your shareholders are better off.

C.

In this case, your shareholders are worse off.

Part 5

d. What will your price-earnings ratio be after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo's premerger P/E ratio?

If you pay no premium, the P/E ratio after the merger is

enter your response here.

(Round to two decimal places.)Your company's P/E ratio before the merger is

enter your response here.

(Round to two decimal places.)TargetCo's pre-merger P/E ratio is

enter your response here.

(Round to two decimal places.)