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 offers an exchange ratio such that,at current pre-announcement share prices for both firms,the offer represents a 20% premium to buy Associated Steel,then the price per share of the combined corporation after the merger will be closest to:
A)$19.12.
B)$20.00.
C)$26.00.
D)$17.20.

Question

Quizplus · Accepted Answer

The correct answer is A.The combined earnings per share after the merger will be (2*10,000,000 + 1.25*4,000,000)/(10,000,000 + 4,000,000) = $1.83. The combined number of shares outstanding will be 10,000,000 + 4,000,000 = 14,000,000. The price per share of the combined corporation after the merger will be $1.83*14,000,000/$20 = $19.12.

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