If Rearden offers an exchange ratio such that,at current pre-announcement share prices for both firms,the offer represents a 20% 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

A)Value of Associated Steel = $15 × 1.2 per share × 4 million shares = $72 million.Therefore Rearden will have to issue $72 million/$20 per share = 3.6 million new shares to fund the deal.This will give Rearden 10 + 3.6 = 13.6 million shares post merger.The earnings for Rearden premerger = $2 per share × 10 million shares = $20 million and the earnings for Associated steel pre-merge 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/13.6 million shares = $1.84.

If Rearden Offers an Exchange Ratio Such That,at Current Pre-Announcement