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Homework answers / question archive / Consider the following information for two all-equity firms, Firm A and Firm B: Firm A Firm B Total earnings $3,600 $1,320 Shares outstanding 720 480 Price per share $84 $18 Firm A is acquiring Firm B by exchanging 110 of its shares for all the shares in Firm B
Consider the following information for two all-equity firms, Firm A and Firm B: Firm A Firm B Total earnings $3,600 $1,320 Shares outstanding 720 480 Price per share $84 $18 Firm A is acquiring Firm B by exchanging 110 of its shares for all the shares in Firm B. a) What is the cost of the merger if the merged firm is worth $75,600? b) What are the firm A’s EPS and PE ratio before and after the merger?
a). Cost of merger = offer for firm B - value of firm B
= (number of shares of firm A offered*price per share) - (number of shares of firm B*price per share)
= (110*84) - (480*18) = $600
b). Firm A before merger values:
EPS = Total earnings/number of shares = 3,600/720 = 5.00
P/E ratio = price per share/EPS = 84/5 = 16.80
Firm A after merger values:
Number of shares of the merged entity = number of existing shares of firm A + number of shares offered
= 720 + 110 = 830 shares
EPS = (total earnings of A + B)/number of shares = (3,600+1,320)/830 =5.93
Price per share = value of merged entity/number of shares = 75,600/830 = 91.08
P/E ratio = 91.08/5.93 = 15,37
