Acquiring Corp. is considering a takeover of Takeover Target Inc. Acquiring has
ID: 2636150 • Letter: A
Question
Acquiring Corp. is considering a takeover of Takeover Target Inc. Acquiring has 22 million shares outstanding, which sell for $20 each. Takeover Target has 11 million shares outstanding, which sell for $10 each. The merger gains are estimated at $22 million.
If Acquiring Corp. has a price-earnings ratio of 10 and Takeover Target has a P/E ratio of 5, what should be the P/E ratio of the merged firm? Assume in this case that the merger is financed by an issue of new Acquiring Corp. shares. Takeover Target will get one Acquiring share for every two Takeover Target shares held. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Acquiring Corp. is considering a takeover of Takeover Target Inc. Acquiring has 22 million shares outstanding, which sell for $20 each. Takeover Target has 11 million shares outstanding, which sell for $10 each. The merger gains are estimated at $22 million.
If Acquiring Corp. has a price-earnings ratio of 10 and Takeover Target has a P/E ratio of 5, what should be the P/E ratio of the merged firm? Assume in this case that the merger is financed by an issue of new Acquiring Corp. shares. Takeover Target will get one Acquiring share for every two Takeover Target shares held. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Explanation / Answer
The value of acquiring company is price per share multiplied with number of shares outstanding.
Value = $20 X 22,000,000 = $440,000,000
The value of Target company is the price per share multipled with number of shares outstanding.
Value = $10 X 11,000,000 = $110,000,000
P/E ratio of Acquiring is 10 and for Target, it is 5
Earnings for Acquiring = $440,000,000 / 10 = $44 million
Earnings for Target = $110,000,000 / 5 = $22 million
Current earnings = $44 + $22 = $66 million
Gain from merger = $22 million
Total value of the merged firm = $440 million + $110 million + $22 million = $572 million
P/E ratio = $572 / $66 = 8.67 times
Hence, the PE ratio of the merged firm is less than that of the Acquiring corp.
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