Acquiring Company is considering the acquisition of Target Company in a share-for-share transaction in which Target Company would receive $50.00 for each share of its common stock. The Acquiring Company does not expect any change in its P/E multiple after the merger.
Acquiring Co. Target Co.
Earnings available for common stock $150,000 $30,000
Number of shares of common stock outstanding 60,000 20,000
Market price per share $60.00 $40.00
Using the information provided above on these two firms and showing your work,
calculate the following:
a. Purchase price premium:
e. Postmerger EPS of the combined companies:
g. Postmerger share price:
Answer: $56.40 (as compared with $60.00 premerger)
(a). Price paid per share = $50
Current share price for Target Co. - $40
Purchase price premium = (50-40)/40 = 10/40 = 25%
The solution computes Purchase price premium, postmerger EPS, postmerger share price with the given data.