@Fertfood has a current market value of $30 million and earns $2,700,000 annuall

Question

@Fertfood has a current market value of $30 million and earns $2,700,000 annually, while Tools-4U has a market value of $5 million and annual earnings of $1 million per year. If the companies merge an additional cash flow of $136513 would result next year. The merged firm will have 5 million shares. The merged firm's earnings in the first year will comprise the pre-merged earnings of each firm plus the additional cashflow mentioned above. If the post-merged firm's P/E ratio is expected to be 17 what is the expected market price per share using the P/E method?

Explanation / Answer

Earnings of the merged firm = $2.7m + $1m + 136513 = 3836513

Merged firm will have 5 million shares

Earnings per share = 3836513 / 5m = $0.77 per share

The post-merged firm's P/E ratio is expected to be 17

The expected market price per share = P / E = 17 or P = 17 * 0.77 = $13.09 per share

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