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Ball Industries is considering acquiring the Keyes Corporation in a stock-for-stock exchange. Selected financial data on the two companies follow:
Ball
Keyes
Sales (millions)
$600
$75
Earnings after taxes (millions)
$ 30
$10
Common shares outstanding (millions)
6
4
Earnings per share
$ 5
$ 2.50
Common stock (price per share)
$ 50
$20
INTERMEDIATE
CHALLENGE
Assume that no synergistic benefits are expected.
a. What is the maximum exchange ratio Ball should agree to if one of its acquisition criteria is no initial dilution in earnings per share?
b. Suppose an investor had purchased 100 shares of Keyes common stock 5 years ago at $12 a share. If the Keyes stockholders accept an offer of $24 a share in a stock-for-stock exchange, how much capital gains tax would this investor have to pay at the time the Keyes shares are exchanged for the Ball shares? (Assume a capital gains tax rate of 28 percent for this investor.)
Assume that immediate synergistic earnings of $4 million will occur as a result of the acquisition.
c. Calculate the postmerger earnings per share if the Keyes stockholders accept an offer by Ball of $24 a share in a stock-for-stock exchange.
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