Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Your company has earnings per share of $6. It has 1 million shares outstanding, each of which has a price of $40. You are thinking

Your company has earnings per share of $6. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $3, 1 million shares outstanding, and a price per share of $30. 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 your earnings per share be after the merger?

b) Suppose you offer an exchange ratio such that, at current preannouncement share prices for both firms, the offer represents a 25% premium to buy TargetCo. What will your earnings per share be 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 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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Key Financial Market Concepts

Authors: Bob Steiner

2nd Edition

0273750127, 978-0273750123

More Books

Students also viewed these Finance questions

Question

How to write a cod in java for reading a text editor and print it ?

Answered: 1 week ago