Acquiring company is considering the acquisition of target company in a stock for stock transaction in which target company would receive $50.00 for each share of its common stock. the acquiring company does not expect any change in its price/earnings multiple after the merger.

acquiring co. target co.

earnings available for common stock $150,000 $30,000

number of shares of common stock outstanding $60,000 $20,000

market price per share $60.00 $40.00

using the information provided above on these two firms and showing your work, calculate the following:

1) what is the share exchange ratio?

2) how many new shares will be issued by acquiring company?

3) what is the post-merger eps of the combined company?

4) what is the post-merger share price of the combined company?

5) if the purchase is using 100% cash and all the cash is borrowed at an annual rate of 8%, what is post-merger eps of the combined company, assuming the tax rate is 40%?

1) 0.8333

2) 16,666

3) 2.33

4) 56.40

5) 2.2

Explanation:

Share Exchange Ratio = Price per share for Target Company / Market price per share for Acquiring Company  = $50 / $60  =  0.8333

New shares issued by Acquiring Company = Shares of Target Company x Exchange ratio (20,000 x 0.8333) = 16,666

Total shares outstanding of the combined companies = 60,000 + 16,666  = 76,666

Post-merger EPS of the combined companies = ($150,000 + $30,000)/ 76,666 = $2.35

Pre-merger EPS of Acquiring Company = $150,000 / 60,000 = $2.50

Post-merger share price = $2.35 x 24 (pre-merger P/E = $60.00/$2.50) = $56.40

Purchase price = 50 * 20,000 = 1,000,000

Interest expense = 1,000,000 * 8% = 80,000

Post-merger earnings = 150,000 + 30,000 – 80,000 * (1-0.4) = 132,000

Therefore, Post-merger EPS of the combined companies = 132,000/60,000 = 2.2

answer is i don't know

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