Acquiring Company is considering the acquisition of Target Company in a share-fo

Question

Acquiring Company is considering the acquisition of Target Company in a share-for-share transaction in which Target Company would receive $50.00 for each share of its common stock. Acquiring Company does not expect any change in its P/E multiple after the merger. Acquiring Co. Target Co. Earnings available for common stock $150,000 $30,000 Number of shares of common stock outstanding 60,000 20,000 Market price per share $60.00 $40.00 Using the preceding information about these two firms and showing your work, calculate the following:

a. Purchase price premium.

Answer : 25%

e. Postmerger EPS of the combined companies.

Answer: $2.35

g. Postmerger share price.

Answer : $56.40, compared with $60.00 premerger

I need the calculation of each. Thank you.

Explanation / Answer

a. Purchase price premium=(20000*50)-(20000*40)/20000*40=200000/800000=.25=25%

e.post merger EPS of combined companies=(150000+30000)/(60000+20000)=2.35

g.p/e ratio before merger=market price/earning per share=60/2.5=24

market price post merger=p/e ratio *earning per share=24*2.35=56.4

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