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The shareholders of Flannery's Company have voted in favour of a buyout offer from Stultz Corporation
The shareholders of Flannery's Company have voted in favour of a buyout offer from Stultz Corporation. Information about each firm is given here: Price-earnings ratio Shares outstanding Earnings Flannery's 6.35 73,000 $230,000 Stultz 12.70 146,000 $690,000 Flannery's shareholders will receive one share of Stultz stock for every three shares they hold in Flannery's. a-1. What will the EPS of Stultz be after the merger? a-2. What will the P/E ratio be if the NPV of the acquisition is zero? b. What must Stultz feel is the value of the synergy between these two firms?
Expert Solution
A) Earnings of the combined entity will be
2,30,000 + 6,90,000 = 9,20,000
Given share exchange ratio is 1 share of Stultz for every 3 shares of Flannery share
Total Shares of Flannery = 73,000
Number of shares exchanges is 73,000/3 = 24334 Approximate
Total Outstanding shares after the merger is 24334 + 1,46,000 = 170334 Shares
Now EPS = Earnings/Total Outstanding shares
= 9,20,000 / 170334
= 5.4 per share
B) P/E ratio when the NPV is Zero
Price of each share of Stultz before merger is
(P/E ratio * Earnings)/ Total Outstanding shares
= (12.7 * 6,90,000)/1,46,000
= 60$
Price of each share of Flannery before merger is
(6.35 * 2,30,000)/73,000
20$
Here the exchange ratio is justified as per the market price
Hence P/E before acquisition is equal to P/E after acquisition = 12.7
C) Here the share exchange ratio is as per the market prices .
More over it is mentioned that the NPV of the take over is Zero
Hence the value of synergy is Zero. However the firm can gain other forms of non cash benefits in terms of economies of sales, Reduction in cost of production etc
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