Question

Show calculations please

The Carmi Corporation is considering acquiring the Carshena Corporation. The data for two companies are as follows:

	Carshena Corp.	Carmi Corp.
Total earnings.................................................	$500,000	$2,000,000
Number of shares of stock outstanding..........	210,000	1,000,000
Earnings per share..........................................	$2.50	$2.00
Price-earnings ratio (P/E)...............................	16	20
Market price per share....................................	$40	$40

a.   Carmi Corp. is going to give Carshena Corp. a 50 percent premium over Carshena Corp.’s current market value. What price will it pay?

b.   At the price computed in part a, what is the total market value of Carshena Corp.?

c.   How many shares must Carmi Corp. issue to buy the Carshena Corp. at the total value computed in part b? (Keep in mind Carmi Corp.’s price per share is $40.)

d.   Given the answer to part c, how many shares will Carmi Corp. have after the merger?

e.   Add together the total earnings of both corporations and divide by the total shares computed in part d. What are the new post-merger earnings per share?

g.   Why has Carmi Corp.’s earnings per share gone down?

h.   How can Carmi Corp. hope to overcome this dilution?

i.    What are some reasons Carmi Corp. might be willing to buy Carshena at this premium?

j.    Why would Carshena agree to this merger that will apparently result in lower EPS?

Answer 1