Use the following information to answer the question(s)below.
Rearden Metal has earnings per share of $2.It has 10 million shares outstanding and is trading at $20 per share.Rearden Metal is thinking of buying Associated Steel,which has earnings per share of $1.25,4 million shares outstanding,and a price per share of $15.Rearden Metal will pay for Associated Steel by issuing new shares.There are no expected synergies from the transaction.
-If Rearden pays no premium to buy Associated Steel,then Rearden's price-earnings ratio after the merger will be closest to:
A)10.0.
B)10.42.
C)12.0.
D)7.8.

Question

Quizplus · Accepted Answer

Rearden Metal's total earnings after the merger will be $25 million ($20 million from Rearden + $5 million from Associated Steel). The total number of shares after issuing new shares to buy Associated Steel will be 12 million (10 million existing + 2 million new shares). The new EPS will be $25 million / 12 million shares = $2.0833. The price per share remains $20, so the new P/E ratio is $20 / $2.0833 ≈ 10.42.

Use the Following Information to Answer the Question(s)below