Morgan Foods is considering the acquisition of Old Spaghetti Warehouse Inc. in a stock-for-stock exchange. Selected financial data for the two companies is shown below. An immediate synergistic earnings benefit of $1.5 million is expected in this merger, due to cost savings. $$\begin{array} { l r r }
& \text { Morgan } & \text { Old Spaghetti } \
\text { Sales (millions) } & \$ 360 & \$ 80 \
\text { Net income (millions) } & \$ 30 & \$ 8 \
\text { Common stock outstanding (millions) } & 10 & 2 \
\text { Earnings per share } & \$ 3.00 & \$ 4.00 \
\text { Common stock (price per share) } & \$ 36.00 & \$ 44.00
\end{array}$$ ? Calculate the postmerger EPS if the Old Spaghetti shareholders accept an offer of $54 per share in a stock-for-stock exchange.

Question

Morgan Foods is considering the acquisition of Old Spaghetti Warehouse Inc. in a stock-for-stock exchange. Selected financial data for the two companies is shown below. An immediate synergistic earnings benefit of $1.5 million is expected in this merger, due to cost savings. $$\begin{array} { l r r } 
& \text { Morgan } & \text { Old Spaghetti } \
\text { Sales (millions) } & \$ 360 & \$ 80 \
\text { Net income (millions) } & \$ 30 & \$ 8 \
\text { Common stock outstanding (millions) } & 10 & 2 \
\text { Earnings per share } & \$ 3.00 & \$ 4.00 \
\text { Common stock (price per share) } & \$ 36.00 & \$ 44.00
\end{array}$$ ? Calculate the postmerger EPS if the Old Spaghetti shareholders accept an offer of $54 per share in a stock-for-stock exchange.

Quizplus · Accepted Answer

The correct answer is A.The postmerger EPS is calculated as follows:Postmerger EPS = (Premerger EPS of Morgan Foods + Premerger EPS of Old Spaghetti Warehouse + Synergistic earnings benefit) / (Postmerger number of shares)Premerger EPS of Morgan Foods = $3.00Premerger EPS of Old Spaghetti Warehouse = $4.00Synergistic earnings benefit = $1.5 millionPostmerger number of shares = 10 million (Morgan Foods) + 2 million (Old Spaghetti Warehouse) = 12 millionPostmerger EPS = ($3.00 + $4.00 + $1.5 million) / 12 million = $3.04

Morgan Foods Is Considering the Acquisition of Old Spaghetti Warehouse