Below are pro forma data for an acquiring firm and its target. Review the data and answer the questions that follow.
Exhibit 4: Pro-Formas for firm to be acquired (millions of dollars)
Forecasts
2012 2013
Sales 70 80
Cost of Goods 39.8 41.6
Gross Profit 30.2 38.4
Sell & Admin 12.3 12.4
Depreciation 2.3 2.5
EBIT 15.6 23.5
Tax @ 40% 6.24 9.4
EBIAT 9.36 14.1
Exhibit 5: Two-year forecast of the acquirer's earnings, excluding the target (millions of dollars except per-share data)
2012 2013
Net Income 22.0 21.5
Shares Outstanding (mil) 6.81 6.81
Earnings per Share $3.23 $3.16
a. The acquirer's annual interest expense on outstanding debt was $1,000,000 in 2011. Assume this interest expense will remain the same for the next two years, and calculate the acquirer's Net Income for 2012 and 2013.
b. Assume that this will be a stock-for-stock deal. The acquirer's current shareholders are concerned, however, about the deal's potential to dilute their earnings per share. Calculate the maximum number of acquirer shares that can be offered for each target share without diluting the forecasted EPS in each of the given years (2012 and 2013).