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 offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Associated Steel, then the price per share of the combined corporation after the merger will be closest to:Answer choices:A) $17.20B) $26.00C) $20.00D) $19.12

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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 offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Associated Steel, then the price per share of the combined corporation after the merger will be closest to:

Answer choices:
A) $17.20
B) $26.00
C) $20.00
D) $19.12
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Expert Answer

Step 1

With the given information, we can determine the price per share of the combined corporation post 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 When we consider 20% premium, the value will be $60x (1+20%) =$72

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Step 3

Here, price per share refers to t...

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New shares needed to be issued=(Value of the associated steel) (Price per share -72+20-3.6 Therefore, number of shares post-merger=Current shares outstanding New shares needed to be issued -10+3.6=13.6 million

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