Homework Soursecompany A is considering acquisation by shares of company B
company A is considering acquisation by shares of company B. the following information is also available.
company B has agreed to an offer of shs 70 per share to be paid in company A shares.
Required: Advice the managemet on wheter the proposed merger is viable
| Company A | Company B | |
| present earnings | shs 100000 | shs. 25000 |
| shares | 25000 | 10000 |
| earnings per share | shs 10 | shs 7 |
| price/earning ratio | 28 | 20 |
| price of shares | shs 68 | shs 31 |
Solution
Advise to Mangement of Company A : The proposed merger is not viable since the post merger EPS of Company A ( Shs 3.54 / share) is less than the pre mrger EPS of Company A (shs 10 / share) . Reduction in EPS will result in reduction in price/earning ratio of the thecompany .
Explanation :
The Exchange Ratio for merger= shs 70 / shs 68 = 1.0294
Thus , 1.0294 number of shares of Company A shall be given to each share of Company B
Total number of shares to be given to Company B = Number of shares in Company B * Exchange Ratio.
10,000 shares * 1.0294 =10,294 shares
Post merger earning per share for Company A
= ( Earnings of A + Earnings of B ) / Total number of shares post merger
= ( Shs 100,000 + Shs. 25,000) / ( 25000 shares + 10,294 shares )
= Shs 125,000 / 35,294 shares = Shs 3.54 per share
