Graham & Sons wishes to evaluate a proposed merger into the RCN Group. Graham had 2012 earnings of $200,000, has 100,000 shares of common stock outstanding, and expects earnings to grow at an annual rate of 7%. RCN had 2012 earnings of $800,000, has 200,000 shares of common stock outstanding, and expects its earnings to grow at 3% per year.
a. Calculate the expected earnings per share (EPS) for Graham & Sons for each of the next 5 years (2013-2017) without the merger.
b. What would Graham's stockholders earn in each of the next 5 years (2013-2017) on each of their Graham shares swapped for RCN shares at a ratio of (1) 0.6 and (2) 0.8 share of RCN for 1 share of Graham?
c. Graph the premerger and postmerger EPS figures developed in parts a and b with the year on the x axis and the EPS on the y axis.
d. If you were the financial manager for Graham & Sons, which would you recommend from part b, (1) or (2)? Explain your answer