Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction.If Rearden pays no premium to buy Associated Steel, then Rearden's price/earnings ratio after the merger will be closest to:Answer choicesA) 12B) 10.42C) 7.80D) 10

Question
Asked Nov 14, 2019
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Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction.

If Rearden pays no premium to buy Associated Steel, then Rearden's price/earnings ratio after the merger will be closest to:

Answer choices
A) 12
B) 10.42
C) 7.80
D) 10
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Expert Answer

Step 1

With the given information, we can determine the price to earnings ratio after the merger using the following steps:

Step 2
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Value of the associated steel = (Market price per share) x (Number of shares outstanding) =15x4-S60 million

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Step 3
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New shares needed to be issued = (Value of the associated steel) (Price per share) 60 20 3 million Therefore, number of shares post-merger = Current shares outstanding + New shares needed to be issued -10+3=13 million

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