Problem:
Acquiring Company is considering the acquisition of Target Company in a share-for-share transaction in which Target Company would receive $50.00 for each share of its common stock. The Acquiring Company does not expect any change in its P/E multiple after the merger.
Acquiring Co. Target Co.
Earnings available for common stock $150,000 $30,000
Number of shares of common stock outstanding 60,000 20,000
Market price per share $60.00 $40.00
Using the information provided above on these two firms and showing your work, calculate the following:
a. Purchase price premium
b. Postmerger EPS of the combined companies
c. Postmerger share price