Problem
Essex Industries is considering the acquisition of the Twinsburg Company in a stock-for-stock exchange. The following financial data are available on both companies. (Assume no synergy is expected with this merger.) Calculate answers to nearest 0.001.
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Essex
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Twinsburg
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Sales
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$500 million
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$50 million
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Net income
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$100 million
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$15 million
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Common shares outstanding
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20 million
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5 million
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Earnings per share
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$5.00
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$3.00
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Dividends per share
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$1.00
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$0.50
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Common stock market price
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$80
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$60
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Price/earnings ratio
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16
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20
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A. Calculate the exchange ratio if Essex offers the Twinsburg stockholders a 20% premium over Twinsburg's current market price.
B. Calculate the post-merger earnings per share if the exchange ratio is 0.95 shares of Essex for each share of Twinsburg. (Assume total post-merger earnings are $115 million.)
C. What is Essex's post-merger share price if the post-merger price/earnings ratio is 17, and the exchange ratio is 0.8? Assume total post-merger earnings are $115 million.