Assume the following financial data for Rembrandt Paint Co. and Picasso Art Supp
ID: 2789427 • Letter: A
Question
Assume the following financial data for Rembrandt Paint Co. and Picasso Art Supplies:
Rembrandt Paint Co.
Picasso Art Supplies
Total Earnings
$1,200,000
$3,600,000
Number of shares of stock outstanding
600,000
2,400,000
Earnings per share
$2.00
$1.50
Price-Earnings ratio (P/E)
24X
32X
Market Price Per Share
$48
$48
a. If all the shares of Rembrandt Paint Co. are exchanged for those of Picasso Art Supplies on a share for share basis, what will the post merger earnings per share be for Picasso Art Supplies? Use an approach similar to that in table 20-3.
b. Explain why the earnings per share of Picasso Art Supplies has changed.
c. Can we necessarily assume that Picasso Art supplies is better off after the merger?
Rembrandt Paint Co.
Picasso Art Supplies
Total Earnings
$1,200,000
$3,600,000
Number of shares of stock outstanding
600,000
2,400,000
Earnings per share
$2.00
$1.50
Price-Earnings ratio (P/E)
24X
32X
Market Price Per Share
$48
$48
Explanation / Answer
Answer :- In the given question Exchange will be made on the basis of Share Basis i.e Price of Share Basis and price of both the share is same so exchange ratio is 1:1 so, no. of share exchanged to rembrendt paints ltd is 600000.
Rembrendt is assume = A, pisacco art Assumed to be B
Calculation of Earning Per Share After Merger :- No. of share A*EPSof A + No. Of share of B* EPS of B
No. of share A* Exchange Ratio + No. of share B
= 1200000 + 3600000/600000+2400000 = Rs. 1.6 per share
b) EPS changed because earning by Rembrendt is low as compared to Passaco Art but no. of share or market value of share is same and exchanged is based on market value of share. So, rembrendt earn less profit per share as compared to passaco but market value is samed and exchanged is based on market Value so, now share is alloted in 1;1 so thats why eps reduced passaco and increase in rembredth eps after merger
C) After merger there is no impact on market value but Eps is now reduced for shareholder. So, merger is not good for passco.
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