Effects of a Stock Exchange [LO3] Consider the following premerger information about Firm A and Firm B: Total earnings Shares outstanding Price per share Firm A $4,350 1,600 $43 Firm B $1,300 400 $ 47 Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 for each share of B's stock. Both Firm A and Firm B have no debt outstanding. a. What will the earnings per share (EPS) of Firm A be after the merger? b. What will Firm A's price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price-earnings ratio does not change)? c. What will the price-earnings ratio of the postmerger firm be if the market cor- rectly analyzes the transaction? d. If there are no synergy gains, what will the share price of Firm A be after the merger? What will the price-earnings ratio be? What does your answer for the share price tell you about the amount Firm A bid for Firm B? Was it too high? Too low? Explain.
Effects of a Stock Exchange [LO3] Consider the following premerger information about Firm A and Firm B: Total earnings Shares outstanding Price per share Firm A $4,350 1,600 $43 Firm B $1,300 400 $ 47 Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 for each share of B's stock. Both Firm A and Firm B have no debt outstanding. a. What will the earnings per share (EPS) of Firm A be after the merger? b. What will Firm A's price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price-earnings ratio does not change)? c. What will the price-earnings ratio of the postmerger firm be if the market cor- rectly analyzes the transaction? d. If there are no synergy gains, what will the share price of Firm A be after the merger? What will the price-earnings ratio be? What does your answer for the share price tell you about the amount Firm A bid for Firm B? Was it too high? Too low? Explain.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
![Effects of a Stock Exchange [LO3] Consider the following premerger information
about Firm A and Firm B:
Total earnings
Shares outstanding
Price per share
Firm A
$4,350
1,600
$ 43
Firm B
$1,300
400
$ 47
Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 for
each share of B's stock. Both Firm A and Firm B have no debt outstanding.
a. What will the earnings per share (EPS) of Firm A be after the merger?
b. What will Firm A's price per share be after the merger if the market incorrectly
analyzes this reported earnings growth (that is, the price-earnings ratio does not
change)?
c. What will the price-earnings ratio of the postmerger firm be if the market cor-
rectly analyzes the transaction?
d. If there are no synergy gains, what will the share price of Firm A be after the
merger? What will the price-earnings ratio be? What does your answer for the
share price tell you about the amount Firm A bid for Firm B? Was it too high?
Too low? Explain.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F43b01b85-1592-49ca-b44f-1b723586d84a%2Faf68eccd-9990-4fb7-b21b-972518b1c682%2Fqdz0iej_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Effects of a Stock Exchange [LO3] Consider the following premerger information
about Firm A and Firm B:
Total earnings
Shares outstanding
Price per share
Firm A
$4,350
1,600
$ 43
Firm B
$1,300
400
$ 47
Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 for
each share of B's stock. Both Firm A and Firm B have no debt outstanding.
a. What will the earnings per share (EPS) of Firm A be after the merger?
b. What will Firm A's price per share be after the merger if the market incorrectly
analyzes this reported earnings growth (that is, the price-earnings ratio does not
change)?
c. What will the price-earnings ratio of the postmerger firm be if the market cor-
rectly analyzes the transaction?
d. If there are no synergy gains, what will the share price of Firm A be after the
merger? What will the price-earnings ratio be? What does your answer for the
share price tell you about the amount Firm A bid for Firm B? Was it too high?
Too low? Explain.
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