Consider the following premerger information about Firm A and Firm B: $$\begin{array} { l r r }
& { \text { Firm A } } & { \text { Firm B } } \
\text { Total earnings } & \$ 930 & \$ 650 \
\text { Shares outstanding } & 620 & 210 \
\text { Price per share } & \$ 40 & \$ 20
\end{array}$$ 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?
A)$1.60
B)$1.86
C)$1.95
D)$2.02
E)$2.10

Question

Consider the following premerger information about Firm A and Firm B: $$\begin{array} { l r r } 
&  { \text { Firm A } } & { \text { Firm B } } \
 \text { Total earnings } & \$ 930 & \$ 650 \
\text { Shares outstanding } & 620 & 210 \
\text { Price per share } & \$ 40 & \$ 20
\end{array}$$ 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?
A)$1.60
B)$1.86
C)$1.95
D)$2.02
E)$2.10

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