Question

Prior to the merger, Firm A has $1,250 in total earnings with 750 shares outstanding at a market price per share of $42. Firm B has $740 in total earnings with 220 shares outstanding at $21 per share. Assume Firm A acquires Firm B via an exchange of stock of 0.5 share of A’s stock for each share of B's stock. Both A and B have no debt outstanding and the merger does not create any synergy. What will the earnings per share of Firm A be after the merger? A) $2.10 B) $1.67 C) $3.36 D) $2.05 E) $2.31

Answer 1

Answer:

E) $2.31

Explanation:

Shares offered to Firm B = Shares outstanding * 0.5

= 220 * 0.5

= 110 shares

Total shares of firm A after merger = Shares outstanding before merger + Shares offered to Firm B

= 750 + 110

= 860 shares

Total earnings of firm A after merger = $1,250 + 740

Total earnings of firm A after merger = $1,990

Earnings per share of firm A after merger = Total earnings of firm A after merger / Total shares of firm A after merger

Earnings per share of firm A after merger = $1,990 / 860

Earnings per share of firm A after merger = $2.31 per share