(Stock for Stock Merger) A Corporation is considering the acquisition of X Corpo
ID: 2723806 • Letter: #
Question
(Stock for Stock Merger) A Corporation is considering the acquisition of X Corporation. Each corporation has the following data:
Existing Income Number of Shares
A Corporation $4,200,000 621,000
X Corporation $2,200,000 365,000
Synergistic additional benefits from the combination are $1,200,000.
What is the minimum exchange ratio is necessary to keep the X shareholders whole in terms of earnings per share?
What is the maximum exchange ratio would the A Corporation shareholder accept in taking over X Corporation and remain whole in terms of earnings per share? (note you will need to use the formulas in the book to solve this)
Explanation / Answer
1
Calculation of minimum exchange ratio necessary to keep the X shareholders whole in terms of earnings per share:
Existing Income of X Corporation (A)
$ 2,200,000
Number of Shares of X Corporation (B)
365000
Existing Earnings per share of X Corporation (C) = A/B =
$ 6.0274
Assuming number of shares issued to X Shareholders by A Corporation = X
Combined income after acquisition (4200000+2200000+1200000)
$ 7,600,000
Number of shares after acquisition (621000+X)
(621000+X)
After Acquisition, X Shareholders would like to earn minimum Earning per share of $ 6.0274
Hence,
7600000 / (621000+X) = 6.0274
7600000 = (621000+X)*6.0274
7600000 = 3743015.40+X*6.0274
X*6.0274 = 7600000 -3743015.40
X = 3856984.60 /6.0274
X = 639909 Shares
Hence number of shares issued to X Shareholders by A Corporation =
639909
Existing shares of X Corporation =
365000
Exchange ratio = 639909 / 365000 =
1.7531 : 1
2
Calculation of minimum exchange ratio that A Corporation shareholder accept in taking over X Corporation and remain whole in terms of earnings per share:
Existing Income of A Corporation (A)
$ 4,200,000
Number of Shares of A Corporation (B)
621000
Existing Earnings per share of A Corporation (C) = A/B =
$ 6.7633
Assuming number of shares issued to X Shareholders by A Corporation = X
Combined income after acquisition (4200000+2200000+1200000)
$ 7,600,000
Number of shares after acquisition (621000+X)
(621000+X)
After Acquisition, A Shareholders would like to earn minimum Earning per share of $ 6.7633
Hence,
7600000 / (621000+X) = 6.7633
7600000 = (621000+X)*6.7633
4200009.30
7600000 = 4200009.30+X*6.7633
3399990.70
X*6.7633= 7600000 - 4200009.30
X*6.7633= 3399990.70
X= 3399990.70/6.7633
502711.7975
X = 502712 Shares
Hence number of shares issued to X Shareholders by A Corporation =
502712
Existing shares of X Corporation =
365000
Exchange ratio = 502712 / 365000 =
1.3773 : 1
1
Calculation of minimum exchange ratio necessary to keep the X shareholders whole in terms of earnings per share:
Existing Income of X Corporation (A)
$ 2,200,000
Number of Shares of X Corporation (B)
365000
Existing Earnings per share of X Corporation (C) = A/B =
$ 6.0274
Assuming number of shares issued to X Shareholders by A Corporation = X
Combined income after acquisition (4200000+2200000+1200000)
$ 7,600,000
Number of shares after acquisition (621000+X)
(621000+X)
After Acquisition, X Shareholders would like to earn minimum Earning per share of $ 6.0274
Hence,
7600000 / (621000+X) = 6.0274
7600000 = (621000+X)*6.0274
7600000 = 3743015.40+X*6.0274
X*6.0274 = 7600000 -3743015.40
X = 3856984.60 /6.0274
X = 639909 Shares
Hence number of shares issued to X Shareholders by A Corporation =
639909
Existing shares of X Corporation =
365000
Exchange ratio = 639909 / 365000 =
1.7531 : 1
2
Calculation of minimum exchange ratio that A Corporation shareholder accept in taking over X Corporation and remain whole in terms of earnings per share:
Existing Income of A Corporation (A)
$ 4,200,000
Number of Shares of A Corporation (B)
621000
Existing Earnings per share of A Corporation (C) = A/B =
$ 6.7633
Assuming number of shares issued to X Shareholders by A Corporation = X
Combined income after acquisition (4200000+2200000+1200000)
$ 7,600,000
Number of shares after acquisition (621000+X)
(621000+X)
After Acquisition, A Shareholders would like to earn minimum Earning per share of $ 6.7633
Hence,
7600000 / (621000+X) = 6.7633
7600000 = (621000+X)*6.7633
4200009.30
7600000 = 4200009.30+X*6.7633
3399990.70
X*6.7633= 7600000 - 4200009.30
X*6.7633= 3399990.70
X= 3399990.70/6.7633
502711.7975
X = 502712 Shares
Hence number of shares issued to X Shareholders by A Corporation =
502712
Existing shares of X Corporation =
365000
Exchange ratio = 502712 / 365000 =
1.3773 : 1
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