Question

Group Co. currently has 4,000 shares outstanding each sold for $100, whereas, Intel Toc. has 3.000 shares outstanding each sold for $50. The earnings per share for Group Co. and Intel Inc. is $11 per hare. Group Co decides to acquire Intel Ine. by offering three new shares of Group Co. for every six shares of Intel Inc. Assume that the merger increases the sale of the combined films by $30.000.

1. What is the Earning Per Share for Group Co. after merger?

2.What is the price earnings ratio of Group Co. after the merger?

3. What is the cost of the merger?

Answer 1

a is refered to Group Co

b is refered to Intel Toc

1) Earning Per Share after merger is calculated as follows :-

EPS_ab = PAT_a + PAT_b + synergy in earnings / N_ab

PAT(profit after tax)=EPS * no o f shares

PAT_a = 11*4000 = 44,000

PAT_b= 11*3000= 33,000

synergy in earnings = $30.000

N_{ab =} Total no of shares after merger =4000+1500 =5500

no of shares issued = 3000/6*3 = 1,500

EPS_ab = 44,000+ 33,000+ 30.000 / 5500

EPS_ab= 19.45

2) price earnings ratio after merger = market price per share / eps

  market price per share (V_ab) = V_a+ V_b+ synergy in value / N_ab

V_{a =}  4000*100 =400,000

  V_{b =} 3000*50 = 150,000

  synergy in value = 0

= 400,000+ 150,000+ 0 / 5500

market price per share (V_ab) = 100

price earnings ratio after merger = 100 / 19.45

= 5.14 times