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). 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