EPS and postmerger price Data for Henry Company and Mayer Services are given in

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 price/earnings (P/E) multiple after the merger as before merging. Calculate the ratio of exchange in market price. Calculate the earnings per share (EPS) and price/earnings (P/E) ratio for each company. Calculate the price/earnings (P/E) ratio used to purchase Mayer Services. Calculate the postmerger earnings per share (EPS) for Henry Company. Calculate the expected market price per share of the merged firm. Discuss this result in light of your findings in part a.

Explanation / Answer

Exchange Ratio(based on Market Price)= MPs of Mayer/MPs of Henry

= $50/$45= 1.11 Share

Calculation of Post Merger EPS And Market price

Calculation of Post Merger EPS And Market price If Exchange ratio based on Market price

If Exchange ratio is based on Market price then wealth of Shareholder in Existing co. will not effected due to merger.

Henry Co. Mayer Ser. Earning for Common Stock $225,000.00 $50,000.00 No. of Share 90000 15000 EPS (Earning/No. of Stock) $2.50 $3.33 Market Price per share $45.00 $50.00 P/E Ratio (MPs/EPS) 18 15

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