Finance help please! Thanks Lets say that Big Corp acquires Little Corp in a mer

Question

Finance help please! Thanks

Lets say that Big Corp acquires Little Corp in a merger that is arranged as a stock swap. Big has 2 million shares outstanding. Bigs shares are selling for $71.50 a share, and the ratio of Bigs share price to its last four quarters of earnings per share is 20 (P/E = 20). Little has one million shares outstanding. Littles shares are selling for $40 a share, and the ratio of Littles share price to its last four years of earnings per share is 30 (P/E = 30). The exchange ratio in the stock swap is .6 shares of Big for each share of Little. Big will obtain all of the shares used in the swap by issuing new shares.

Explanation / Answer

1. It is paying 1,000,000 shares times 0.6 * $71.5 = $42,900,000

2. 600,000, because it is issuing 0.6 share each for 1,000,000 shares.

3. 71.5

4. We know Big earned $71.50/20 = $3.575 per share, and it has 2 million shares out, so it earned $7,150,000. We know Little earned $40/30 = $1.333 per share and it has 1 million shares out, so it earned $1,333,333. So the combined entity will earn $8,483,333 and will have 2.6 million shares out (2 million that Big started with, plus 600,000 that they are issuing for the acquisition). Its EPS is 8483333/2600000 = $3.2628. If the stock continues to sell at 71.5, the new P/E is 71.5/3.2628 = 21.91

5. The fact that Little had a higher P/E (30 vs 20) than Big means that the market perceived it as faster growing. Now the shareholders of Big get to own this thing at only a 21.9 P/E.

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