9.9 Procureps, Inc. (P) is considering two possible acquisitions, neither of whi

Question

9.9 Procureps, Inc. (P) is considering two possible acquisitions, neither of which promises any enhancements or synergistic benefits. V1 is a poorly performing firm in a declining industry with a price-to-earnings ratio of 8 times. V2 is a high-growth technology company with a price-to-earnings ratio of 35 times. Procureps is interested in making any acquisition that increases its current earnings per share. All of Procureps’s acquisitions are exchange-of-share mergers.

a. Calculate the maximum percentage premium Procureps can afford to pay for V1 and V2 by replacing the question marks in the following table.

Explanation / Answer

Company P V1 P + V1 V2 P + V2 Earnings after tax ($Million) 2 1 3 1 3 Price earning ratio (X) 30 8 35 Market Value of Equity (Earning x PE Ratio) ($Million) 60 8 35 No. of Equity shares (Million) 1 1 2 1 2 Earning per share (Earnings after tax / No. of Equity Shares) ($) 2 1 1 Price per share (PE Ratio x EPS) 60 8 35

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