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Problem 21-5 Mergers and P/E Ratios (LO1) Castles in the Sand currently sells at a price-earnings multiple of 20. The firm has 2 million shares outstanding and sells at a price per share of $90. Firm Foundation has a P/E multiple of 18, has 1 million shares outstanding, and sells at a price per share of $45. a. If Castles acquires the other firm by exchanging one of its shares for every two of Firm Foundation, what will be the earnings per share of the merged firm? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What will be the price per share for Castle? Note: Do not round intermediate calculations. c. What would be Firm Foundation's value of stock post merger? Note: Do not round intermediate calculations. Enter your answer in millions. d. What should be the P/E of the new firm if the merger has no economic gains? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. e. Calculate Castles' price per share if the market does not realize that the P/E ratio of the merged firm ought to differ from Castles' premerger ratio. Note: Do not round intermediate calculations. f. How are the gains from the merger split between shareholders of the two firms if the market is fooled as in part (e)? Note: Enter your answers in millions. a. Earnings per share b. Price per share c. Value of stock d. P/E e. Price per share f. Castles in the Sand (CS) f. Firm Foundation (FF) million million million

Problem 21-5 Mergers and P/E Ratios (LO1) Castles in the Sand currently sells at a price-earnings multiple of 20. The firm has 2 million shares outstanding and sells at a price per share of $90. Firm Foundation has a P/E multiple of 18, has 1 million shares outstanding, and sells at a price per share of $45. a. If Castles acquires the other firm by exchanging one of its shares for every two of Firm Foundation, what will be the earnings per share of the merged firm? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What will be the price per share for Castle? Note: Do not round intermediate calculations. c. What would be Firm Foundation's value of stock post merger? Note: Do not round intermediate calculations. Enter your answer in millions. d. What should be the P/E of the new firm if the merger has no economic gains? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. e. Calculate Castles' price per share if the market does not realize that the P/E ratio of the merged firm ought to differ from Castles' premerger ratio. Note: Do not round intermediate calculations. f. How are the gains from the merger split between shareholders of the two firms if the market is fooled as in part (e)? Note: Enter your answers in millions. a. Earnings per share b. Price per share c. Value of stock d. P/E e. Price per share f. Castles in the Sand (CS) f. Firm Foundation (FF) million million million

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter23: Corporate Restructuring
Section: Chapter Questions
Problem 2P
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Problem 21-5 Mergers and P/E Ratios (LO1) Castles in the Sand currently sells at a price-earnings multiple of 20. The firm has 2 million shares outstanding and sells at a price per share of $90. Firm Foundation has a P/E multiple of 18, has 1 million shares outstanding, and sells at a price per share of $45. a. If Castles acquires the other firm by exchanging one of its shares for every two of Firm Foundation, what will be the earnings per share of the merged firm? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What will be the price per share for Castle? Note: Do not round intermediate calculations. c. What would be Firm Foundation's value of stock post merger? Note: Do not round intermediate calculations. Enter your answer in millions. d. What should be the P/E of the new firm if the merger has no economic gains? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. e. Calculate Castles' price per share if the market does not realize that the P/E ratio of the merged firm ought to differ from Castles' premerger ratio. Note: Do not round intermediate calculations. f. How are the gains from the merger split between shareholders of the two firms if the market is fooled as in part (e)? Note: Enter your answers in millions. a. Earnings per share b. Price per share c. Value of stock d. P/E e. Price per share f. Castles in the Sand (CS) f. Firm Foundation (FF) million million million
Transcribed Image Text:Problem 21-5 Mergers and P/E Ratios (LO1) Castles in the Sand currently sells at a price-earnings multiple of 20. The firm has 2 million shares outstanding and sells at a price per share of $90. Firm Foundation has a P/E multiple of 18, has 1 million shares outstanding, and sells at a price per share of $45. a. If Castles acquires the other firm by exchanging one of its shares for every two of Firm Foundation, what will be the earnings per share of the merged firm? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What will be the price per share for Castle? Note: Do not round intermediate calculations. c. What would be Firm Foundation's value of stock post merger? Note: Do not round intermediate calculations. Enter your answer in millions. d. What should be the P/E of the new firm if the merger has no economic gains? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. e. Calculate Castles' price per share if the market does not realize that the P/E ratio of the merged firm ought to differ from Castles' premerger ratio. Note: Do not round intermediate calculations. f. How are the gains from the merger split between shareholders of the two firms if the market is fooled as in part (e)? Note: Enter your answers in millions. a. Earnings per share b. Price per share c. Value of stock d. P/E e. Price per share f. Castles in the Sand (CS) f. Firm Foundation (FF) million million million
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