Effects of a Stock Exchange Consider the following premerger information about Firm A and Firm B:
Assume that Firm A acquires Firm B via an exchange of stock at a price of $19 for each share of B's stock. Both A and B have no debt outstanding.
a. What will the earnings per share, EPS, of Firm A be after the merger?
b. What will Firm A's price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price-earnings ratio does not change)?
c. What will the price-earnings ratio of the postmerger firm be if the market correctly analyzes the transaction?
d. If there are no synergy gains, what will the share price of A be after the merger? What will the price-earnings ratio be? What does your answer for the share price tell you about the amount A bid for B? Was it too high? Too low? Explain.