Castles in the Sand currently sells at a price-earnings multiple of 24. The firm has 2 million shares outstanding and sells at a price per share of $60. Firm Foundation has a P/E multiple of 12, has 1 million shares outstanding, and sells at a price per share of $30. a. If Castles acquires the other firm by exchanging one of its shares for every two of Firm Foundation, what will be the earnings per share of the merged firm? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What will be the price per share for Castle? Note: Do not round intermediate calculations. c. What would be Firm Foundation's value of stock post merger? Note: Do not round intermediate calculations. Enter your answer in millions. d. What should be the P/E of the new firm if the merger has no economic gains? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. e. Calculate Castles' price per share if the market does not realize that the P/E ratio of the merged firm ought to differ from Castles' premerger ratio. Note: Do not round intermediate calculations. f. How are the gains from the merger split between shareholders of the two firms if the market is fooled as in part (e)? Note: Enter your answers in millions.
Castles in the Sand currently sells at a price-earnings multiple of 24. The firm has 2 million shares outstanding and sells at a price per share of $60. Firm Foundation has a P/E multiple of 12, has 1 million shares outstanding, and sells at a price per share of $30. a. If Castles acquires the other firm by exchanging one of its shares for every two of Firm Foundation, what will be the earnings per share of the merged firm? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What will be the price per share for Castle? Note: Do not round intermediate calculations. c. What would be Firm Foundation's value of stock post merger? Note: Do not round intermediate calculations. Enter your answer in millions. d. What should be the P/E of the new firm if the merger has no economic gains? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. e. Calculate Castles' price per share if the market does not realize that the P/E ratio of the merged firm ought to differ from Castles' premerger ratio. Note: Do not round intermediate calculations. f. How are the gains from the merger split between shareholders of the two firms if the market is fooled as in part (e)? Note: Enter your answers in millions.
Chapter23: Corporate Restructuring
Section: Chapter Questions
Problem 7P
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Transcribed Image Text:Castles in the Sand currently sells at a price-earnings multiple of 24. The firm has 2 million shares outstanding and sells at a price per
share of $60. Firm Foundation has a P/E multiple of 12, has 1 million shares outstanding, and sells at a price per share of $30.
a. If Castles acquires the other firm by exchanging one of its shares for every two of Firm Foundation, what will be the earnings per
share of the merged firm?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
b. What will be the price per share for Castle?
Note: Do not round intermediate calculations.
c. What would be Firm Foundation's value of stock post merger?
Note: Do not round intermediate calculations. Enter your answer in millions.
d. What should be the P/E of the new firm if the merger has no economic gains?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
e. Calculate Castles' price per share if the market does not realize that the P/E ratio of the merged firm ought to differ from Castles'
premerger ratio.
Note: Do not round intermediate calculations.
f. How are the gains from the merger split between shareholders of the two firms if the market is fooled as in part (e)?
Note: Enter your answers in millions.
a. Earnings per share
b. Price per share
c. Value of stock
d. P/E
e. Price per share
f. Castles in the Sand (CS)
f. Firm Foundation (FF)
$
$
3.00
60
20.00
million
million
million
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