Assume the following financial data for Noble Corporation and Barnes Enterprises

Question

Assume the following financial data for Noble Corporation and Barnes Enterprises:
NOBLE BARNES
CORPORATION CORPORATION
Total earnings.......................... $1,200,000 $3,600,000
Number of shares of stock outstanding... 100,000 2,400,000
Earnings per share...................... $2.00 $1.50
Price-earnings ratio (P/E).............. 24X 32X
Market price per share.................. $48 $48

(a) If all the shares of Noble Corporation are exchanged for those of Barnes Enterprises on a share-for-share basis, what will postmerger earnings per share be for Barnes Enterprises? Use an approach similar to that in Table 20-3 on page 619. (ref:Finance Management course 661, chapters 19 through 21, Lesson 28).
(b) Explain why the earnings per share of Barnes Enterprises changed.
(c)Can we necessarily assume that Barnes Enterprises is better off after the merger?

Explanation / Answer

a)(3,600,000+1,200,000)/(2,400,000+ 100,000)= $1.92/ share b) EPS has gone up because Noble had a higher EPS than Barnes did and the shares were swapped on a 1:1 basis. c) If we are talking better off in terms of stock price we would have to see what kind of P/E ratio the market puts on the combination of the two firms. If they feel the combination is not necessarily a good thing the multiple might go down and the stock price might drop.

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