Question - Effects of a Stock Exchange
Consider the following premerger information about firm A and Firm B:
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FIRM A
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FIRM B
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Total earnings
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$2,400
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$1,100
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Shares outstanding
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1,300
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750
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Price per share
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$38
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$17
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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.
Required - Please only answer question d - (a and b are just a reference for d)
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)?
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.