Assume that Martin pays no premium to acquire Luther. Calculate Martin's price-earnings (P/E) ratio both pre and post merger
What will be an ideal response?
Answer: Premerger P/E = price per share / earning price per share = $32.00 / $3 = 10.67
First, since Martin is paying for the merger with stock, the number of shares that Martin must issue
= ($2.50 × 2 million) / $32 = 1.25 million
So the total number of shares in the new merged firm
= 5 million (existing Martin shares) + 1.25 million new shares = 6.25 million shares.
Total earnings for the merged firm = Earnings from Martin + Earnings from Luther.
Earnings from Martin = EPS × shares outstanding = $3.00 × 5 million = $15 million
Earnings from Luther = EPS × shares outstanding = $2.50 × 2 million = $5 million
Total earnings = $15 + $5 = $20 million
EPS of merged firm = $20 million / 6.25 million = $3.20
Post merger P/E = Price per share / earning per share = $32 / $3.20 = $10
You might also like to view...
Strategic planning for a large firm such as Disney with several SBUs probably occurs ________
A) only in its corporate headquarters B) only at the individual business unit level C) at both the overall corporate level and at the individual SBU level D) as needed based upon the success of the division E) at the location best suited for this function based upon findings of the SWOT analysis
Listing them in the proper order, what are the stages in the buyer decision process? Describe each
What will be an ideal response?