EPS and postmerger price Data for Henry Company and Mayer Services are given in
ID: 2655724 • Letter: E
Question
EPS and postmerger price Data for Henry Company and Mayer Services are given in the following table. Henry Company is considering merging with Mayer by swapping 1.25 shares of its stock for each share of Mayer stock. Henry Company expects its stock to sell at the same prcie/earnings (P/E) multiple after the merger as before merging.
Item Henry Company Mayer Services
Earnings available for common stock $225,000 $50,000
Number of shares of common stock outstanding 90,000 15,000
Market price per share $45 $50
a) Calculate the ratio of exchange in market price.
b) Calculate the earnings per share (EPS) and price/earnings (P/E) ratio for each company.
c) Calculate the price/earnings (P/E) ratio to be used to purchase Mayer Services.
d) Calculate the postmerger earnings per share (EPS) for Henry Company.
d) Calculate the expected market price per share of the merged firm. Discuss this result in light of your findings in part a.
Explanation / Answer
Answer:
a) Calculation of ratio of exchange :
Given that : Henry Company is considering merging with Mayer by swapping 1.25 shares of its stock for each share of Mayer stock
It means exchange ratio in market price = 1.5 *$45 for $50
=$67.5 for $50
So exchange ratio = 67.50 / 50 = 1.35 :1
b) Calculation of the earnings per share (EPS) and price/earnings (P/E) ratio:
EPS = Earnings available for common stock / Number of shares of common stock outstanding
Hence,
EPS for Henry = $225000 / 90000 = $2.50
EPS for Mayer = $50000 / 15000 = $3.33
(P/E) ratio = Market price per share / EPS
Hence
PE Ratio for Henry = 45 / 2.50 = 18 Times
PE Ratio for Mayer = 50 / 3.33 = 15 Times
c) Calculation of the price/earnings (P/E) ratio to be used to purchase Mayer Services:
EPS of Mayer = $3.33
Price Paid for one share = $ 67.50
Hence PE ratio = 67.50 / 3.33 = 20 times
d) Calculation of the postmerger earnings per share (EPS) for Henry Company:
Post merger EPS = Post merger Earnings available for common stock / Post merger Number of shares of common stock outstanding
= (225000 + 50000) / (90000 + 15000*1.25)
=275000 / 108750
=$2.53
e) Calculation of the expected market price per share of the merged firm:
Expected market price per share = Post merger EPS * Expected PE ratio
=2.53 * 18 times
=$45.54
We can see that post merger Market price per share has increased as compared to premerger market price per share , this is due to synergy gains.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.