Your company has earnings per share of $ 5 . It has 1 million shares? outstanding, each of which has a price of $ 35 . You are thinking of buying? TargetCo, which has earnings per share of $ 1 ?, 1 million shares? outstanding, and a price per share of $ 24 . You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offer an exchange ratio such? that, at current? pre-announcement share prices for both? firms, the offer represents a 25 % premium to buy TargetCo. Assume that on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for TargetCo. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover.
a. What is the price per share of the combined corporation immediately after the merger is? completed? round to the earest cents
b. What is the price of your company immediately after the? announcement? round to the nearest cent
c. What is the price of TargetCo immediately after the? announcement? round to the nearest cent
d. What is the actual premium your company will? pay? round to one decimal decimal place
| Firm | Target | |||
| a) | EPS | 5 | 1 | |
| No. of shares (million) | 1 | 1 | ||
| Price | 35 | 24 | ||
| Earnings (EPS X No. of shares) (millions) | 5 | 1 | ||
| To buy target, new share issued (million)= 24*1.25/35 | 0.86 | million | ||
| New price of combined entity = (35 + 24)/(1.86) | 31.72 | |||
| b) | Price of company is same as after merger | 31.72 | ||
| c) | Since target shareholders get 0.86 X 31.72 million, the stock price is 31.72 X 0.86/1 | |||
| Target share price | 27.28 | |||
| d) | Actual premium | 27.28/24-1 | 13.66% | |
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