The shareholders of Flannery Company have voted in favor of a buyout offer from

Question

The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here:

Flannery’s shareholders will receive one share of Stultz stock for every three shares they hold in Flannery.

What will the EPS of Stultz be after the merger? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)

What will the PE ratio be if the NPV of the acquisition is zero? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

What must Stultz feel is the value of the synergy between these two firms? (Do not round intermediate calculations.)

The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here:

Explanation / Answer

a)

EPS after merger = (F company earnings + S companys earnings)/(F company proportion * Company shares outstanding + S company shares outstandig)

= (130000 + 910000)/(1/3*78000 + 300000)

= 3.190

b)

Market price per share = (PE ratio * earnings)/number of shares outstanding)

= (30 * 910000)/300000

= 91

PE ratio = market price per share/earnings per share

= 91/3.190

= 28.53

b)

Market value = PE ratio * earnings

= 18.2 * 130000

= 2366000

cost of acquisition = market price per share * proportion * number of shars outstanding

= 91 * 1/3 * 78000

= 2366000

NPV = value of F + synergy - cost of acquisition

0 = 2366000 + 0 - 2366000

hence there is not synergy between two firms

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