Problem:
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 ?
1. 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.
- Complete the above table for the merged firm.
- How many shares of World Enterprises are exchanged for each share of Wheelrim and Axle?
- What is the cost of the merger to World Enterprises?
- What is the change in the total market value of the World Enterprises shares that were outstanding before the merger?