assignment 7

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St. John's University *

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Course

3311

Subject

Finance

Date

Jan 9, 2024

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pdf

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2

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Problem 30.3 12 points 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 $24 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? 2 points Total Cost of B = $24 * 280 = $6720 Cost of B in A Stock = $6720 / 45 = 149.33 shares Shares Outstanding After Merger = 149.33 + 590 = 739.33 Total Earnings After Merger = $940 + $630 = $1570 EPS after Merger = $1570 / 739.33 = $2.12 b. What will firm A ’s price per share be after the merger if the price–earnings ratio does not change? 3 points. If the price–earnings ratio remains at 28.24, then firm A ’s price per share will be $59.98. P/E ratio = 28.24 EPS = 1570/739.33 = 2.12 Price per Share = 28.24*2.12 = $ 59.98 c. i. If there are no synergy gains, what will the share price of A be after the merger? 3 points Firm value with no synergy gains = $26,550 + $5,600 = $32,150 Price per share of A after merger = $32,150/739.33 = $43.49 ii. If there are no synergy gains, what will the price–earnings ratio be? 2 points P/E ratio = $43.49 / $2.12 = 20.48 iii. What does your answer for the share price tell you about the amount A bid for B ? Was it too high? Too low? Explain. 2 points Firm A is bidding a premium of 20% ((24-20)/20). Assuming there are no synergy gains, the shareholders of the acquiring firm are losing (share price falls from $45 to $43.49). Therefore, the bid is too high.
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