Question

Question 9(10 points). Martin Manufacturing has earnings per share (EPS) of $3.00, 5 million shares outstanding, and a share price of $32. Martin is considering buying Luther Industries, which has earnings per share of $2.50, 2 million shares outstanding, and a share price of $20. Martin will pay for Luther by issuing new shares. There are no expected synergies from the transaction. a)lf Martin pays no premium to acquire Luther, what will the carnings per share be after the merger? b) Assume that Martin pays no premium to acquire Luther. Calculate Martin's price-carnings (P/B) ratio both pre- and post-merger P/E) ratio both pre- and post-merger

Answer 1

a.
Calculation of new shares to be issued
New shares = Value of Luther company / Martin share price
New shares = (20*2) / 32
New shares	1.25	million
The total number of shares after merger = 5 million + 1.25 million = 6.25 million
Total earnings after merger = Net earnings of martin + Net earnings of Luther
Total earnings after merger = (5*3) + (2.50*2)
Total earnings after merger		20	million
EPS of merged firm = ($20/6.25)			$3.20
EPS after the merger is $3.20
b.
Martin's pre merger PE ratio = Price/EPS
Martin's pre merger PE ratio = 32/3
Martin's pre merger PE ratio		$10.67
Martin's post merger PE ratio = 32/3.20
Martin's post merger PE ratio		$10