Question

just need part d please show equations

Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2,1 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. a. If you pay no premium to buy TargetCo, what will be your earnings per share after the merger? b. Suppose you offer an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy TargetCo. What will be your earnings per share after the merger? c. What explains the change in earnings per share in (a)? Are your shareholders any better or worse off? d. What will be your price-earnings ratio after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo's premerger P/E ratio? # of new shares you have to issue total shares after merger Total earnings from TargetCo Total earnings from Aquirer Total earnings after merger EPS after merger # of new shares you have to issue total shares after merger EPS after merger Value of the aquirer pre-merger Value of the target pre-merger Total equity value after merger Stock price after merger P/E ratio after merger P/E ratio of aquirer pre-merger P/E ratio of target pre-merger

Answer 1

Part d)

i) Value of the acquirer pre merger

= market price per share * no. of shares outstanding of acquirer

= $ 40 * 1 million = $ 40 million

ii) Value of the target pre merger

= market price per share * no. of shares outstanding of target

= $ 25 * 1 million = $ 25 million

iii) total equity value after merger

= Market price per share * (no. of shares outstanding of acquirer + no. of shares issued to Target)

= $40 * (1 million + { 1 million * (2/4)})

= $40 * 1.5 million shares

= $ 60 million

1a)Stock price after merger,

Earning per share after merger

= Total earnings / after merger no. of shares outstanding

= ( {$4 * 1 million shares of acquirer} + {$2 * 1 million shares of target}) / ( 1 million shares of acquirer + { 1 million shares of target * exchange ratio 2/4}

= $ 6 million / 1.5 million after merger shares

= $ 4

P/E ratio after merger = stock price after merger / earnings per share after merger

Therefore stock price after merger = earning per share after merger * PE ratio after merger

= $4 * 10

= $ 40

1b) P/E ratio after merger = Earnings per share / stock price after merger

= $40 / $ 4

= 10 times

1c) P/E ratio of acquirer pre merger

= $40 / $ 4

= 10 times

1d) P/E ratio of target pre merger

= $ 25 / $2

= 12.50 times

There is no change in the P/E ratio of pre merger and after merger since the exchange ratio of merger is calculated based on the earnings per share