EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 28, Problem 9P
Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction.
- a. If you pay no premium to buy TargetCo, what will your earnings per share be after the merger?
- b. Suppose you offer an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy TargetCo. What will your earnings per share be after the merger?
- c. What explains the change in earnings per share in part (a)? Are your shareholders any better or worse off?
- d. What will your price-earnings ratio be after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo‘s premerger P/E ratio?
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Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $60. You are
thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of
$45. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Complete
parts a through d below.
a. If you pay no premium to buy TargetCo, what will your earnings per share be after the merger?
Your new earnings per share will be $ ☐ .
(Round to the nearest cent.)
Your company has earnings per share of $4.20. It has 1.3 million shares outstanding, each of which has
a price of $38.80. You are thinking of buying TargetCo, which has earnings per share of $2.10, 1.4
million shares, and a price per share of $25.60. You will pay for TargetCo by issuing new shares. There
are no expected synergies from the transaction. If you pay no premium to buy TargetCo, what will be
your earnings per share after the merger?
EPS = $2.93
EPS = $4.98
EPS = $3.78
%3D
EPS = $12.42
.Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account.
a.If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $22; (ii) $20; (iii) $18? Assume that Xtel pays no dividends.
b.If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call?
c.Redo parts (a) and (b), but now assume that Xtel also has paid a year-end dividend of $1 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.13.
Chapter 28 Solutions
EBK CORPORATE FINANCE
Ch. 28.1 - Prob. 1CCCh. 28.1 - Prob. 2CCCh. 28.2 - On average, what happens to the target share price...Ch. 28.2 - Prob. 2CCCh. 28.3 - What are the reasons most often cited for a...Ch. 28.3 - Prob. 2CCCh. 28.4 - Prob. 1CCCh. 28.4 - What do risk arbitrageurs do?Ch. 28.5 - Prob. 1CCCh. 28.5 - Prob. 2CC
Ch. 28.6 - Prob. 1CCCh. 28.6 - Prob. 2CCCh. 28 - What are the two primary mechanisms under which...Ch. 28 - Prob. 2PCh. 28 - What are some reasons why a horizontal merger...Ch. 28 - Prob. 4PCh. 28 - Prob. 5PCh. 28 - Prob. 6PCh. 28 - How do the carryforward and carryback provisions...Ch. 28 - Diversification is good for shareholders. So why...Ch. 28 - Your company has earnings per share of 4. It has 1...Ch. 28 - If companies in the same industry as TargetCo...Ch. 28 - Prob. 11PCh. 28 - Prob. 12PCh. 28 - Prob. 13PCh. 28 - Lets reconsider part (b) of Problem 99. The actual...Ch. 28 - ABC has 1 million shares outstanding, each of...Ch. 28 - Prob. 16PCh. 28 - How does a toehold help overcome the free rider...Ch. 28 - Prob. 18P
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