Consider the following premerger information about Firm A and Firm B: Assume that Firm A acquires Firm B via an exchange of stock at a price of $25 for each share of B's stock. Both A and B have no debt outstanding. What will the earnings per share of Firm A be after the merger?

Question

Consider the following premerger information about Firm A and Firm B:  Assume that Firm A acquires Firm B via an exchange of stock at a price of $25 for each share of B's stock. Both A and B have no debt outstanding. What will the earnings per share of Firm A be after the merger?

Quizplus · Accepted Answer

Cost of acquisition = 210 ($25) = $5,250Since the stock price of the acquiring firm is $40, the firm will have to give up:Shares offered = $5,250/$40 = 131.25 sharesThe EPS of the merged firm will be the combined earnings of the existing firms divided by the new shares outstanding, so:EPS = ($930 + $650)/(620 + 131.25) = $2.10

Consider the Following Premerger Information About Firm a and Firm