Acquiring Corp. is considering a takeover of Takeover Target Inc. Acquiring has

Question

Acquiring Corp. is considering a takeover of Takeover Target Inc. Acquiring has 10 million shares outstanding, which sell for $40 each. Takeover Target has 5 million shares outstanding, which sell for $20 each. The merger gains are estimated at $25 million. If Acquiring Corp. has a price-earnings ratio of 12 and Takeover Target has a P/E ratio of 8, 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.) P/E

Explanation / Answer

Hi, Please find the answer as follows: Acquiring:Value = 400 million P/E = 12 Earnings = 400 /12 = 33.33 million Target:value = 100 million P/E = 8 Earnings = 100 /8 = 12.50 million Merged value = 400 + 100 + 25 = 525 million Current earnings = 33.33 + 12.50 = 45.83 million P/E = 525/45.83 = 11.46 Thanks, Aman

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