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    M&A evaluation: Purchase price premium, postmerger EPS

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    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:
    Answer: 25%
    e. Postmerger EPS of the combined companies:
    Answer: $2.35
    g. Postmerger share price:
    Answer: $56.40 (as compared with $60.00 premerger)

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    Solution Preview

    (a). Price paid per share = $50
    Current share price for Target Co. - $40

    Purchase price premium = (50-40)/40 = 10/40 = 25%

    (b) ...

    Solution Summary

    The solution computes Purchase price premium, postmerger EPS, postmerger share price with the given data.