Willow Enterprises is considering the acquisition of Steadfast Corp. in a stock

Question

Willow Enterprises is considering the acquisition of Steadfast Corp. in a stock swap transaction. Currently, Willow’s stock is selling for $45 per share. Although Steadfast’s shares are currently trading at $30 per share, the firm’s asking price is $60 per share.

a. If Willow accepts Steadfast’s terms, what is the ratio of exchange?

b. If Steadfast has 15,000 shares outstanding, how many new shares must Willow issue to consummate the transaction?

c. If Willow has 110,000 shares outstanding before the acquisition, and earnings for the merged company are estimated to be $450,000, what is the EPS for the merged company?

Explanation / Answer

a. The ratio of exchange will be = 60:45 or 4:3 or 1.33:1. This means for every 3 shares in Steadfast company, Willow company will give 4 shares.

b. New shares to be issued by willow = 15000*4/3 = 20,000 shares

c. Total shares outstanding after the acquisition = 110,000 + 20,000 = 130,000 shares
EPS of the merged firm = Expected Earnings / shares outstanding = 450,000 / 130,000 = $3.46 per share

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