Essex Industries is considering the acquisition of Twinsburg Company in a stock-for-stock exchange. The following financial data are available on both companies. (Assume no synergy is expected with this merger.) Calculate answers to nearest 0.001.? ? $\begin{array}{lrr}
& \text { Essex } &{\text { Twinsburg }} \
\text { Sales } & \$ 500 \text { million } & \$ 50 \text { million } \
\text { Net income } & \$ 40 \text { million } & \$ 3.74 \text { million } \
\text { Common shares outstanding } & 5 \text { million } & 1 \text { million }\
\text { Earnings per share } & \$ 8.00 & \$ 3.74 \
\text { Dividends per share } & \$ 3.00 & \$ 1.00 \
\text { Common stock market price } & \$ 64 & \$ 24 \
\text { Pricelearnings ratio } & 8 & 6.42
\end{array}$ ?
Calculate the exchange ratio if Essex offers the Twinsburg stockholders a 20% premium over Twinsburg's current market price.

Question

Essex Industries is considering the acquisition of Twinsburg Company in a stock-for-stock exchange. The following financial data are available on both companies. (Assume no synergy is expected with this merger.) Calculate answers to nearest 0.001.? ? $\begin{array}{lrr} 
& \text { Essex } &{\text { Twinsburg }} \
\text { Sales } & \$ 500 \text { million } & \$ 50 \text { million } \
\text { Net income } & \$ 40 \text { million } & \$ 3.74 \text { million } \
\text { Common shares outstanding } & 5 \text { million } & 1 \text { million }\
\text { Earnings per share } & \$ 8.00 & \$ 3.74 \
\text { Dividends per share } & \$ 3.00 & \$ 1.00 \
\text { Common stock market price } & \$ 64 & \$ 24 \
\text { Pricelearnings ratio } & 8 & 6.42
\end{array}$ ?
Calculate the exchange ratio if Essex offers the Twinsburg stockholders a 20% premium over Twinsburg's current market price.

Quizplus · Accepted Answer

The exchange ratio is calculated by dividing the offer price per share of the target company by the acquirer's current market price per share. Given a 20% premium over Twinsburg's current market price of $24, the offer price per share for Twinsburg would be $24 * 1.20 = $28.8. Therefore, the exchange ratio is $28.8 / $64 = 0.45.

Essex Industries Is Considering the Acquisition of Twinsburg Company in a Stock-For-Stock