Question

Acquiring Company is considering the acquisition of Target Company in a stock for stock transaction in which Target Company would receive $50.00 for each share of its common stock. The Acquiring Company does not expect any change in its pricelearnings multiple after the merger. Acquiring Co. $150,000 Target Co. $30,000 Earnings available for common stock 60,000 20,000 Number of shares of common stock outstanding Market price per share $60.00 $40.00 Using the information provided above on these two firms and showing your work, calculate the following:

1. What is the share exchange ratio?

2. How many new shares will be issued by Acquiring Company?

3. What is the post-merger EPS of the combined company?

4. What is the post-merger share price of the combined company?

5. If the purchase is using 100% cash and all the cash is borrowed at an annual rate of 8%, what is post-merger EPS of the combined company, assuming the tax rate is 40%?

Answer 1

1]

share exchange ratio = (acquisition price per share) / market price per share of Acquiring Co.

share exchange ratio = $50 / $60

share exchange ratio = 0.83.

The Target Co.'s shareholders will receive 0.83 shares of the Acquiring Co.'s for every 1 share held in the Target Co.

2]

new shares issued = exchange ratio * number of shares outstanding in Target Co.

new shares issued = 0.83 * 20,000

new shares issued = 16,666.67.

As fractional shares cannot be issued, this is rounded off to 16,667.

3]

Post merger EPS = total earnings of combined company / shares outstanding after merger.

total earnings of combined company = sum of individual company's earnings.

total earnings of combined company = $150,000 + $30,000 = $180,000.

shares outstanding after merger = shares outstanding before merger + new shares issued.

shares outstanding after merger = 60,000 + 16,667 = 76,667.

Post merger EPS = $180,000 / 76,667

Post merger EPS = $2.35.

4]

Post-merger share price = sum of pre-merger values of two firms / shares outstanding after merger.

sum of pre-merger values of two firms = sum of (shares outstanding * market price per share) of both firms.

sum of pre-merger values of two firms = (60,000 * $60) + (20,000 * $40) = $4,400,000.

Post-merger share price = $4,400,000 / 76,667

Post-merger share price = $57.39