FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT
FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT
10th Edition
ISBN: 9781260848670
Author: BREALEY
Publisher: MCG
Question
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Chapter 21, Problem 5QP

a.

Summary Introduction

To determine: The EPS of the merged firm.

a.

Expert Solution
Check Mark

Answer to Problem 5QP

The EPS of the merged firm is $4.20.

Explanation of Solution

Determine the EPS and total earnings of Company CS

EPSCompanyCS=[SharePricePERatio]=[$40$10]=$4TotalEarnings=[EPS×SharesOutstanding]=[$4×2,000,000]=$8,000,000

Therefore, the EPS is $4 and total earnings is $8,000,000.

Determine the EPS and total earnings of Company FF

EPSCompanyFF=[SharePricePERatio]=[$20$8]=$2.50TotalEarnings=[EPS×SharesOutstanding]=[$2.50×1,000,000]=$2,500,000

Therefore, the EPS is $2.50 and total earnings is $2,500,000.

Determine the EPS of the merged firm

EPSMergedFirm=[TotalEarningsTotalShares]=[$8,000,000+$2,500,0002,000,000+(1,000,0002)]=[$10,500,0002,500,000]=$4.20

Therefore, the EPS of merged firm is $4.20.

b.

Summary Introduction

To determine: The price per share of Company CS.

b.

Expert Solution
Check Mark

Answer to Problem 5QP

The price per share of Company CS is $40.

Explanation of Solution

Determine the price per share of Company CS

PricepershareCompanyCS=[TotalValueTotalShares]=[($40×2,000,000)+($20×1,000,000)2,000,000+(1,000,0002)]=[$100,000,0002,500,000]=$40

Therefore, the price per share of Company CS is $40.

c.

Summary Introduction

To discuss: The demonstration of Company CS or Company FF realize any change in wealth.

c.

Expert Solution
Check Mark

Answer to Problem 5QP

The value of Company CS and Company FF is Unchanged.

Explanation of Solution

  • Company FF have a stock worth of $20,000,000 ($40*500,000 shares), so the wealth of Company FF is unchanged.
  • The wealth of Company CS is also unchanged.

Therefore, the value of Company CS and Company FF is Unchanged.

d.

Summary Introduction

To determine: The P/E ratio of new firm if there are no economic gains.

d.

Expert Solution
Check Mark

Answer to Problem 5QP

The P/E ratio of new firm if there are no economic gains is 9.52.

Explanation of Solution

Determine the P/E ratio of new firm if there are no economic gains

The P/E ratio of the merged firm is between the P/E ratio of the two firms.

PEofMergedFirm=[TotalValueTotalEarnings]=[$100,000,000$10,500,000]=9.52381or9.52

Therefore, the P/E ratio of new firm if there are no economic gains is 9.52.

e.

Summary Introduction

To determine: The price per share of Company CS.

e.

Expert Solution
Check Mark

Answer to Problem 5QP

The price per share of Company CS is $42.

Explanation of Solution

If the P/E ratio of Company CS remains constant at 10, then the merged firm will the share price at $42 per share ($4.20*10). This will result in an increase in the firm value to $105,000,000 ($42*2,500,000).

Therefore, price per share of Company CS is $42.

f.

Summary Introduction

To determine: The gains from the merger split between shareholders of the two firms.

f.

Expert Solution
Check Mark

Answer to Problem 5QP

The gain of Company CS is $4,000,000 and Company CS is $1,000,000.

Explanation of Solution

Determine the gain of Company CS and Company FF

GainCompanyCS=[Pricepershare×SharesOutstanding]=[$2×2,000,000]=$4,000,000GainCompanyFF=[ValueofSharesActualFirmValue]=[($42×500,000)$20,000,000]=$1,000,000

Therefore, the gain of Company CS is $4,000,000 and Company CS is $1,000,000.

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