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) $1.85
B) $1.90
C) $2.00
D) $2.25

Question

Quizplus · Accepted Answer

Rearden Metal's total earnings after the merger will be the sum of its own earnings ($2 * 10 million = $20 million) and Associated Steel's earnings ($1.25 * 4 million = $5 million), totaling $25 million. Rearden will issue new shares to pay for Associated Steel, which costs $15 per share for 4 million shares, totaling $60 million. At Rearden's current price of $20 per share, it will issue 3 million new shares ($60 million / $20 per share). The new total number of shares will be 13 million (10 million + 3 million). The new EPS will be $25 million / 13 million shares = approximately $1.92, closest to $1.90.

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