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What will the price-earnings ratio be

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Question - Effects of a Stock Exchange

Consider the following premerger information about firm A and Firm B:

 

FIRM A

FIRM B

Total earnings

$2,400

$1,100

Shares outstanding

1,300

750

Price per share

$38

$17

Assume that Firm A acquires Firm B via an exchange of stock at a price of $19 for each share of B's stock. Both A and B have no debt outstanding.

Required - Please only answer question d - (a and b are just a reference for d)

a. What will the earnings per share, EPS, of Firm A be after the merger?

b. What will Firm A's price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price-earnings ratio does not change)?

d. If there are no synergy gains, what will the share price of A be after the merger? What will the price-earnings ratio be? What does your answer for the share price tell you about the amount A bid for B? Was it too high? Too low? Explain.

Reference no: EM131773939

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