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9.1 Problem Set Questions

The document presents a problem set involving financial calculations related to mergers and acquisitions, including earnings per share (EPS) analysis, price-earnings ratios, and the impact of acquisition premiums. It also discusses the potential gains from an acquisition and the costs associated with cash and share offers. Additionally, it highlights the complications that arise when a target company's stock price increases prior to a merger bid, affecting the bidder's evaluation of potential gains.

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18 views1 page

9.1 Problem Set Questions

The document presents a problem set involving financial calculations related to mergers and acquisitions, including earnings per share (EPS) analysis, price-earnings ratios, and the impact of acquisition premiums. It also discusses the potential gains from an acquisition and the costs associated with cash and share offers. Additionally, it highlights the complications that arise when a target company's stock price increases prior to a merger bid, affecting the bidder's evaluation of potential gains.

Uploaded by

reminationtv
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Problem Set

1. Your company has earnings per share of £4. It has 1 million shares outstanding, each of which
has a price of £40. You are thinking of buying TargetCo, which has earnings per share of £2,
1 million shares outstanding, and a price per share £25. You will pay for TargetCo by issuing
new shares. There are no expected synergies from the transaction.
(a) If you pay no premium to buy TargetCo, what will your earnings per share be after the
merger?
(b) If you pay a 20% premium to buy TargetCo, what will your earnings per share be after
the merger?
(c) What explains the change in earnings per share in part (a)? Are shareholders any better
or worse off?
(d) What will your price-earnings ratio be after the merger (if you pay no premium)? How
does this compare to your P/E before the merger? How does this compare to TargetCo’s
pre-merger P/E ratio?

2. As treasurer of Company A, you are investigating the possible acquisition of Company B. You
have the following basic data:

Company A B
Next year’s expected EPS £5 £1.50
Next year’s expected Div per share £3.00 £0.80
Number of shares 1,000,000 600,000
Stock price £90 £20

You estimate that investors currently expect a steady growth of about 6% in B’s earnings
and dividends. Under new management this growth rate would be increased to 8% per year,
without any additional capital investment required.
(a) What is the gain from the acquisition?
(b) What is the cost of the acquisition if A pays £25 in cash for each share of B?
(c) What is the cost of the acquisition if A offers one share of A for every three shares of B?
(d) How would the cost of cash offer and the share offer alter if expected growth rate of B
were not changed by the merger?

3. Sometimes the stock price of a possible target company rises in anticipation of a merger bid.
Explain how this complicates the bidder’s evaluation of the merger gains.

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