Question

TIUVIUM (20 points) You are given the following facts: World Enterprises (A) Wheelrim& Axle Merged Company (AB) (B) dor EPS $2.4 $3 3.20 Price per share $48 ? $36 12 P/E 20 number of shares 120,000 240,000 ? Total Earnings $288,000 $720,000 Total market value $5,760,000 $8,640,000

Answer 1

Ans.

a)

	World Enterprise	Wheelrim & Axle	Merged Company
EPS	$ 2.40	$                               3.00	$                                  3.20
Price Per Share	$                            48.00	$                             36.00	$                                45.71
P/E	12 times	12 times	14.29 times
Number of Shares	120,000.00	240,000.00	315,000.00
Total Earnings	$                  288,000.00	$                  720,000.00	$                  1,008,000.00
Total Market Value	$             5,760,000.00	$               8,640,000.00	$               14,400,000.00

Total Market Value= $ 5,760,000 + $ 8,640,000 = $ 14,400,000

Earnings=$ 288,000 +$ 720,000 = $1,008,000

EPS=Earnings/Shares

3.20= 1,008,000/shares

Shares= 315,000

Price= Market Value / No. of shares

Price = $ 14,400,000 / 315,000 = $45.71

P/E = $45.71 / 3.2 = 14.29 ttimes

b) New shares issued by World Enterprises (315,000 - 120,000 ) = 195,000 shares in order to take over Wheelrim and Axle, which has 240,000 shares outstanding.

So, 195,000 / 240,000 = 0.8125

0.8125 shares of World Enterprises were exchanged for each share of Wheelrim and Axle.

c) Cost of Merger to World Emterprise

World Enterprises paid a total of (195,000 × $45.71) = $ 8,913,450

The total market value of Wheelrim and Axle = $ 8,640,000

So the cost of merger to World Emterprise = $ 8,913,450 - $ 8,640,000 = $ 273,450

d)

The change in market value of World Emterprise shares will be a decrease of $ 273,450.