Question

As an analyst, you need to calculate the maximum number of acquirer shares that can be offered for each target share without diluting the forecasted acquirer's EPS. The tax rate is 20%. No debt is issued for this merger.

	Acquirer	Target
NI (millions)	15	4
Out Shrs	25	6

All numbers are in millions. Note you will have to compute EPS before answering this question.

Answer to one decimal place

Answer 1

Current EPS of Acquirer = NI / Outstanding shares = 15 / 25 = 0.60

Total net income after acquisition = 15 + 4 = 19 million

Required EPS after acquisition = 0.60 (atleast)

Therefore maximum number of share that can be issued to acquire target = total number of shares after acquisition - existing outstanding shares of acquirer

Maximum number of share that can be issued to acquire target = total NI / Required EPS - 25

Maximum number of share that can be issued to acquire target = 19 / 0.6 - 25 = 6.7 million shares