2·The Fouke Corporation is considering acquiring the Foredyce Corporation. The d

Question

2·The Fouke Corporation is considering acquiring the Foredyce Corporation. The data for two companies are as follows: Fouke Corp. Foredyce Corp. $400,000 200,000 $2.50 16 $40 $2,000,000 1,000,000 $2.00 20 $40 Total earnings Earnings per share. Price-earnings ratio (P/E.. Market price per shar Fouke Corp. is going to give Foredyce Corp. a 50 percent premium over Foredyce Corp.'s current market value. What price will it pay? At the price computed in part a, what is the total value of Foredyce Corp.? How many shares must Fouke Corp. issue to buy the Foredyce Corp. at the total value computed in part b? (Keep in mind Fouke Corp.'s price per share is $40.) Given the answer to part c, how many shares will Fouke Corp. have after the merger? Add together the total earnings of both corporations and divide by the total shares computed in part d. What are the new post-merger earnings per share? a. b. c. d. e. f Why has Fouke Corp.'s earnings per share gone down? g. How can Fouke Corp. hope to overcome this dilution? h. What are some reasons Fouke Corp. might be willing to buy Foredyce at this premium? Why would Foredyce agree to this merger that will apparently result in lower EPS? i.

Explanation / Answer

a

Foredyce Corp's shares have a markey value of $40 per share

At 50% premium, price that Fouke corp will pay per share = $40 * (1+ 50%) = $60

b

Total value of Foredyce Corp = Market price per share of Foredyce Corp * number of shares of Foredyce Corp = $60 * 200000 = $12,000,000

c

Price per share of Fouke Corp = $40

Number of shares to be issued = Total market Value to be acquired / Price per share of Fouke Corp = $12,000,000/$40 = 300000

d

Number of shares (Fouke) before issue = 1000000

Number of shares issued = 300000

Total number of shares after the issue = Shares outstanding before issue + Shares issued = 1000000 + 300000 = 1300000

e

Combined earnings of Fouke corp and Foredyce corp = $2000000 + $400000 = $2400000

Number of shares of Fouke = 1300000

Earnings per share of Fouke = $2400000/1300000 = $1.846

f

Earnings per share of Fouke has gone down as it has bought shares of Foredyce at a 50% premium. Dilution of EPS happens when additional shares are issued to acquire the target company.

g

Fouke corp is hoping to derive more value from this acquisition than it has paid out. Acquisition happens to create synergy. Fouke is hoping to utilize the resources of Foredyce to improve its earnings or cut back costs.

h

Probablt because Foredyce has assets that will Fouke sees value in. Acquisition premium is paid to make the deal seem attractive to the target company.

i

Dilution of EPS is a temporary phonemena. EPS will improve after synergisation. Mergers and acquisitions happen on premise that whole will be greater than sum of parts.

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