Progressive Ltd is determined to increase its earnings per share from $1 to $1.33, so it acquires Lo-Gear. The following facts are provided:
Item Progressive Lo-Gear Merged company
Earnings per share ($) 1.00 1.25 1.33
Price per share ($) 20.00 12.50 ?
Price-earnings ratio 20.00 10.00 ?
Number of shares 100000 200000 ?
Total earnings ($) 100000 250000 ?
Total market value ($) 2 000000 2500000 ?
There are no economic benefits from combining the two companies. In exchange for Lo-Gear's shares, Progressive issues just enough of its own shares to ensure its $1.33 earnings-per-share objective.
a. Complete the table for the merged company.
b. How many shares of Progressive are exchanged for each share of Lo-Gear?
c. What is the net cost of the takeover to Progressive?
d. What is the change in the total market value of the Progressive shares that were on issue before the takeover?
e. Based on these results, comment on the use of earnings-per-share comparisons in assessing the viability of takeovers.