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 pays no premium to buy Associated Steel,then Rearden's earnings per share after the merger will be closest to:
A)10
B)10.42
C)12
D)7.8

Question

Quizplus · Accepted Answer

B)Value of Associated Steel = $15 per share × 4 million shares = $60 million.Therefore Rearden will have to issue $60 million/$20 per share = 3 million new shares to fund the deal.This will give Rearden 10 + 3 = 13 million shares post merger.The earnings for Rearden premerger = $2 per share × 10 million shares = $20 million and the earnings for Associated steel pre-merger are $1.25 per share × 4 million shares = $5 million.Therefore the post-merger earnings for Rearden are $20 + $5 = $25 million and the EPS = $25 million/13 million shares = $1.92.
Price per share of Rearden will not change,so P/E ratio = $20/1.92 = 10.42

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