EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
expand_more
expand_more
format_list_bulleted
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?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
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
Your company has earnings per share of $4.49. It has 1.621 million
shares outstanding, each of which has a price of $45.00. You are thinking of buying
TargetCo, which has earnings per share of $1.50, 1.335 million shares outstanding,
and a price per share of $21.00. 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 15% 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
010
Your company has earnings per share of $3. It has 1 million shares outstanding, each of which has a price of $38. You are thinking of buying TargetCo, which has earnings of $3 per share, 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. Suppose you offered an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 15% premium to buy
TargetCo. However, the actual premium that your company will pay for TargetCo when it completes the transaction will not be 15%, because on the announcement the target price will go up and your price will go down to reflect the fact that you are willing
to pay a premium for TargetCo without any synergies. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover (ignore time value of money).
a. What is the price per share of the…
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
Additional Business Textbook Solutions
Find more solutions based on key concepts
Real options and its types. Introduction: The net present value is the variation between present cash inflows v...
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
The cost of capital. Introduction: The cost of capital is the opportunity cost involved in making a specific in...
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Define investors’ expected rate of return.
Foundations of Finance (9th Edition) (Pearson Series in Finance)
(PI calculation) Calculate the PI given the following free cash flows if the appropriate required rate of retur...
Foundations Of Finance
Discussion Analysis A13-41 Discussion Questions 1. How do managers use the statement of cash flows? 2. Describ...
Managerial Accounting (4th Edition)
1-1. Define marketing and outline the steps in the marketing process. (AASCB: Communication)
Marketing: An Introduction (13th Edition)
Knowledge Booster
Similar questions
- .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.arrow_forwardSuppose 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: $22, $20, and $18? Assume that Xtel's 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 has paid a year end dividend of $1 per share. The pruces in part a should be interpreted as ex-dividend, that is prices after the dividend has been paid.arrow_forwardAnswer the following questions on margin trading. a) Suppose that Intel is currently selling at $20 per share. You believe that the stock price of Intel will increase. So you buy 1,000 shares using $15,000 of your own money, borrowing the remainder ($5,000) of the purchase price from your broker. (i) What is the percentage increase in the net worth of your brokerage account if the price of Intel immediately changes to: (i) $24; (ii) $16? (ii) If the maintenance margin is 25%, how low can Intelľ's price fall before you get a margin call? (iii) How would your answer to part ii) change if you had financed the initial purchase with only $10,000 of your own money? b) Discuss margin buying of common stocks. Include in your discussion the advantages and disadvantages and investors' motivation of employing the margin buying strategy.arrow_forward
- Suppose you decide that the Bear Company stock is selling at too high a price at its current $50 per share price. You are convinced that the price of Bear stock will fall in the next couple of months, so you decide to sell 100 shares of Bear stock short. Ignoring transactions costs, if the Bear Company does not pay dividends, what is your profit or loss if the stock’s price goes to: $40 and you buy at that price to cover your short?arrow_forwardSuppose that Xtel currently is selling at $20 per share. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.a. What is the percentage increase in the net worth of your brokerage account if the price of Xtel immediately changes to: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage return and the percentage change in the price of Xtel?b. If the maintenance margin is 25%, how low can Xtel’s price fall before you get a margin call?c. How would your answer to (b) change if you had financed the initial purchase with only $10,000 of your own money?d. What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Xtel is selling after 1 year at: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage return and the percentage change in the price of Xtel? Assume that Xtel pays no dividends.e.…arrow_forwardSuppose that you sell short 1000 shares of Xtel, currently selling for $50 per share, and give your broker $40,000 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) $55; (ii) $50; (iii) $46? Assume that Xtel pays no dividends. (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.) b. If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call? (Round your answer to 2 decimal places.) c. Redo parts (a) and (b), but now assume that Xtel also has paid a year-end dividend of $2 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid. (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)arrow_forward
- (can you explain how did they solve this: (show full solution and formula) USE THE FOLLOWING INFORMATION FOR THE PROBLEM (1) You decide to sell short 200 shares of XCorp stock at a price of $75. Your margin deposit is 65 percent. Commission on the sale is 1.25%. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25% per year. (1) Suppose at the end of one year XCorp is selling at $90 per share and you cover your short position at this price. What is your rate of return on the investment?(Assume a 1.25% commission on the purchase) -40.64% -25.53% 21% 7% –71.2% Ans: Rate of return = [75-90-0.9375-1.125-1.75- (1-.65)(75)(.0525)]/[(.65)(75)+0.9375] =-40.64% Option aarrow_forward) 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. Assume 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. How many new shares Rearden needs to issue to pay for this deal? What is the exchange ratio? What will be the price per share of the combined corporation after the merger? What will be the price per share of the Rearden immediately after the announcement? What will be the price per share of the Associated Steel immediately after the announcement? What is the actual premium Rearden will pay? Is this an accretive or dilutive deal?…arrow_forwardSuppose that XTel currently is selling at $40 per share. You buy 500 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%. Required:a. What is the percentage increase in the net worth of your brokerage account if the price of XTel immediately changes to (i) $44; (ii) $40; (iii) $36? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.) b. If the maintenance margin is 25%, how low can XTel’s price fall before you get a margin call? (Round your answer to 2 decimal places.) c. How would your answer to requirement b change if you had financed the initial purchase with only $10,000 of your own money? (Round your answer to 2 decimal places.) d. What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if XTel is selling after one year…arrow_forward
- XYZ has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. XYZ is thinking of buying ABC, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. XYZ will pay for ABC by issuing new shares. There are no expected synergies from the transaction. A) If XYZ offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy ABC, then the price per share of the combined corporation after the merger will be closest to: B) If XYZ offers cash at a price such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy ABC, then the price per share of the combined corporation after the merger will be closest to:arrow_forwardRearden 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) 10arrow_forwardSuppose that XTel currently is selling at $60 per share. You buy 1,000 shares using $48,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%. Required:a. What is the percentage increase in the net worth of your brokerage account if the price of XTel immediately changes to (i) $66; (ii) $60; (ii) $54? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.) b. If the maintenance margin is 20%, how low can XTel’s price fall before you get a margin call? (Round your answer to 2 decimal places.) c. How would your answer to requirement b would change if you had financed the initial purchase with only $30,000 of your own money? (Round your answer to 2 decimal places.) d. What is the rate of return on your margined position (assuming again that you invest $48,000 of your own money) if XTel is selling…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education