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Question - Sunny Ltd is planning to merge with Day Ltd. Under the merger one share in Sunny Ltd will be exchanged for every 1.25 shares in Day Ltd. The new firm will be called Sunnyday Ltd. As a result of the merger a reduction in costs in the amount of $80,000 is projected along with synergistic benefits resulting from the increased distribution network and market share. As a result of these improvements the P/E of the new firm is projected to be 20X.
Sunny Ltd
Day Ltd
Total Earnings
$1,375,000
$583,333
Number of shares outstanding
275,000
150,000
EPS
$5.00
$3.89
P/E Ratio
14X
18X
Market Price per share
$70
Required - Calculate the expected market value of the merged firm and advise Sunny Ltd. whether they should go ahead with the merger, giving the reason for your recommendation.
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