Your company has earnings per share of $4.46. It has 1.9 million sharesoutstanding, each of which has a price of $45. You are thinking of buyingTargetCo, which has earnings per share of $2.23, 1.7 million sharesoutstanding, and a price per share of $28. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction.

a. If you pay no premium to buyTargetCo, what will your earnings per share be after themerger?

b. Suppose you offer an exchange ratio suchthat, at currentpre-announcement share prices for bothfirms, the offer represents a 20% premium to buy TargetCo. What will your earnings per share be after themerger?

c. What explains the change in earnings per share in part (a)? Are your shareholders any better or worseoff?

d. What will yourprice-earnings ratio be after the merger(if you pay nopremium)? How does this compare to yourP/E ratio before themerger? How does this compare toTargetCo's premergerP/E ratio?