Question

Assume the following financial data for Rembrandt Paint Co. and Picasso Art Supplies: Rembrandt Paint Co. Picasso Art Supplies Total earnings $ 352,000 $ 1,020,000 Number of shares of stock outstanding 110,000 510,000 Earnings per share $ 3.2 $ 2.0 Price-earnings ratio (P/E) 10 16 Market price per share $ 32 $ 32 If all the shares of Rembrandt Paint Co. are exchanged for those of Picasso Art Supplies on a share-for-share basis, what will postmerger earnings per share be for Picasso Art Supplies? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Rembrandt Paint Co. Market price per share = $ 32

Picasso Art Supplies market price per share = $32

Exchange ratio = Target Co. Share price / Acquiring co. Share price

= 32/32

= 1

So, for 110,000 shares of Rembrandt Paint Co. 1*110000= 110,000 Share of Picasso Art Supplies will be given.

So, Total no. Of shares of Picasso Art Supplies = Existing shares + new shares issued to Target= 510000+110000

=620,000

Post merger Eps formula = (Earnings of Target co. + Earnings of Acquiring Co.)/ Total No. Of shares

= (352000 + 1020000)/620000

=2.2129

So, post merger EPS of Picasso Art suppliers will be $2.21