Problem:
The Blue Oil Corporation and the Grey Plastics Company have agreed to a merger. The Grey Plastics stockholders will receive .75 shares of Blue for each share of Grey held. Assume that no synergistic benefits are expected.
a. Complete the following table:
Blue Oil Grey Plastics Combined
Sales (in millions) 500 125
Earnings after taxes (millions) 60 13
Common shares outstanding (m) 16 4
Earnings per share 3.75 3.25
Common stock (price per share) 41.25 26
Price-Earnings ratio 10.0
b. Calculate the premium percentage received by Grey stockholders
Assume both that immediate synergistic earnings of $3 million per year will occur as a result of the merger and that the P/E ratio of the combined companies is 10.5
c. Rework part A
d. Rework part B