Tangy is attempting to acquire Target. Selected financial data is presented for

Question

Tangy is attempting to acquire Target. Selected financial data is presented for both companies in the table below:

Item

Tangy

Target Co.

Earnings Available for common stock

$10,000,000

$1,000,000

Number of shares of common stock outstanding

1,000,000

50,000

Market price per share

$100

$120

           Tangy has sufficient authorized but unissued shares to carry out the proposed merger.

           (a) Calculate the EPS of Tangy and Target before the merger.

           (b) If the ratio of exchange is 1.8, what will be the earnings per share of the merged company?

Item

Tangy

Target Co.

Earnings Available for common stock

$10,000,000

$1,000,000

Number of shares of common stock outstanding

1,000,000

50,000

Market price per share

$100

$120

Explanation / Answer

Requirement (a). EPS of Tangy and Target before the merger.

EPS = Earnings Available for common stock / Number of shares of common stock outstanding

EPS of Tangy = $10,000,000 / 1,000,000 Shares = $10 per share

EPS of Target = $1,000,000 / 50,000 Shares = $20 per share

Requirement (b).Earnings per share of the merged company

Earnings per share of the merged company = Earnings Available for common stock / (Number of shares of Tangy + Shares to be issued to Target)

= [$10,000,000 / $1,000,000 ] / [1,000,000 + ( 50,000 x 1.80) ] Shares

= $11,000,000 / 1,090,000 Shares

= $10.09 per share

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