Task: The Muck and Slurry merger has fallen through but World Enterprises is determined to report earnings per share of $2.67. It therefore acquires the Wheelrim and Axle Company. You are given the following facts:
World Enterprises Wheelrim and Axle Merged Co
Earnings per share $2.00 $2.50 $2.67
Price per share $40 $25 ?
Price-earnings ratio 20 10 ?
Number of shares 100,000 200,000 ?
Total earnings $200,000 $500,000 ?
Total market value $4,000,000 $5,000,000 ?
There are no gains from merging. In exchange for Wheelrim and Axle shares, World Enterprises issues just enough of its own shares to ensure its $2.67 earnings per share objective.
1. Complete the above table for the merged firm.
2. How many shares of World Enterprises are exchanged for each share of Wheelrim and Axle?
3. What is the cost of the merger to World Enterprises?
4. What is the change in the total market value of the World Enterprises shares that were outstanding before the merger?