Your company has earnings per share of $4. It has 1 million shares outstanding, with a price per share 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 your earnings per share be after the merger?
(b) Suppose you oer an exchange ratio such that, at current pre-announcement share prices for both rms, the oer represents a 20% premium to buy TargetCo. What will your earnings per share be after the merger?
(c) What explains the change in earnings per share in part (a)? Are your shareholders any better or worse o?
(d) What will your price-earnings ratio be 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 pre-merger P/E ratio?