Question: The Alpha Company plans to take over the Omega Company. Relevant data before the merger are as follows:
Synergetic effects in a combination of Alpha and Omega are expected to produce after-tax cash flows of $ 1,000 annually.
(a) If Alpha offered a one-for-one share exchange with Omega (based on their identical market prices) and the share value of the combined firm remained unchanged at $35, what would be the new price/earnings ratio and earnings per share for Alpha immediately after the acquisition?
(b) The management of Alpha, noting that its earnings per share would rise with the offer in (a) decides to entice shareholders of Omega with a more attractive offer. Specifically, for each 2 shares of Omega, the shareholder could receive 1 share of Alpha and a $50, 3-year note paying 1 6-percent interest annually. What would be Alpha's earnings per share immediately after the takeover?
(c) If this were a horizontal merger, discuss the likely impact of the fusion under alternative (b) above on the acquiring firm's cost of common equity.