Question

# Your company has earnings per share of \$5. It has 1 million shares​ outstanding, each of...

Your company has earnings per share of

\$5.

It has

1

million shares​ outstanding, each of which has a price of

\$39.

You are thinking of buying​ TargetCo, which has earnings of

\$2

per​ share,

1

million shares​ outstanding, and a price per share of

\$21.

You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offered an exchange ratio such​ that, at current​ pre-announcement share prices for both​ firms, the offer represents a

16%

premium to buy TargetCo. ​ However, the actual premium that your company will pay for TargetCo when it completes the transaction will not be

16%​,

because 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 without any synergies. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover​ (ignore time value of​ money).

a. What is the price per share of the combined corporation immediately after the merger is​ completed?

b. What is the price of your company immediately after the​ announcement?

c. What is the price of TargetCo immediately after the​ announcement?

a. The price per share of the combined corporation immediately after the merger is completed will be

​\$nothing.

​(Round to the nearest​ cent.)

target company price = 21

so premium = 21*16% = 3.36

so price offered = 21 + 3.36 = 24.36

exchange ratio = offer price / current price

=24.36 / 39

= 0.6246

Total number of shares after buying = 1 + 0.6246 = 1.6246

a)

Price = (target company price + current price) / total nuber of shares

= (39+21) / 1.6246

= 36.93

b)

it is exactly same as calculated above = 36.93

c)

Price of target company = Price after aquisition * exchange ratio

= 36.93*0.6246

= 23.07

d)

Actual premium = (Price of target company after aquisition - price before aquisition) / Price before aquisition

= (23.07 - 21) / 21

= 9.85%