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Earnings per share (EPS)
Market price per share
Price/earnings (P/E) ratio Cleveland Corporation Lewis Tool $200,000 $50,000 50,000 20,000 $4.00 $2.50 $50.00 $15.00 12.5 6 748 PART 6 Special Topics in Managerial Finance Cleveland has sufficient authorized but unissued shares to carry out the proposed merger.
a. How many new shares of stock will Cleveland have to issue to make the proposed merger?
b. If the earnings for each firm remain unchanged, what will the postmerger
earnings per share be?
c. How much, effectively, has been earned on behalf of each of the original
shares of Lewis stock?
d. How much, effectively, has been earned on behalf of each of the original
shares of Cleveland Corporation’s stock?
LG3 17–8 Ratio of exchange Calculate the ratio of exchange (1) of shares and (2) in market price for each of the cases shown in the following table. What does each
ratio signify? Explain. Current market price
Case Price per
share offered $50 $25 $ 30.00 B 80 80 100.00 C 40 60 70.00 D 50 10 12.50 E LG3 Target
company A LG3 Acquiring
company 25 20 25.00 17–9 Expected EPS—Merger decision Graham & Sons wishes to evaluate a proposed merger into the RCN Group. Graham had 2003 earnings of $200,000,
has 100,000 shares of common stock outstanding, and expects earnings to grow
at an annual rate of 7%. RCN had 2003 earnings of $800,000, has 200,000
shares of common stock outstanding, and expects its earnings to grow at 3%
a. Calculate the expected earnings per share (EPS) for Graham & Sons for each
of the next 5 years (2004–2008) without the merger.
b. What would Graham’s stockholders earn in each of the next 5 years
(2004–2008) on each of their Graham shares swapped for RCN shares at a
ratio of (1) 0.6 and (2) 0.8 shares of RCN for 1 share of Graham?
c. Graph the premerger and postmerger EPS figures developed in parts a and b
with year on the x axis and EPS on the y axis.
d. If you were the financial manager for Graham & Sons, which would you recommend from part b, (1) or (2)? Explain your answer. 17–10 EPS and postmerger price Data for Henry Company and Mayer Services are
given in the following table. Henry Company is considering merging with Mayer
by swapping 1.25 shares of its stock for each share of Mayer stock. Henry CHAPTER 17 Mergers, LBOs, Divestitures, and Business Failure 749 Company expects its stock to sell at the same price/earnings (P/E) multiple after
the merger as before merging. Item Henry Company Mayer Services $225,000
$50 Earnings available for common stock
Number of shares of common stock outstanding
Market price per share a. Calculate the ratio of exchange in market price.
b. Calculate the earnings per share (EPS) and price/earnings (P/E) ratio for each
c. Calculate the price/earnings (P/E) ratio used to purchase Mayer Services.
d. Calculate the postmerger earnings per share (EPS) for Henry Company.
e. Calculate the expected market price per share of the merged firm. Discuss
this result in light of your findings in part a.
LG4 17–11 Holding company Scully Corporation holds stock in company A and company
B. Consider the accompanying simplified balance sheets for these companies. Assets Liabilities and Stockholders’ Equity
Scully Corporation Common stock holdings Long-term debt Company A $ 40,000 Company B 60,000 Total $100,000 $ 40,000 Preferred stock 25,000 Common stock equity...
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