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    Maximizing Earnings Per Share in an Acquisition

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    Suppose XYZ Corporation's stock is trading at $50.00 per share while ABC Corporation's stock is trading at $25.00 per share. XYZ has earnings per share (EPS) of $1.00 while ABC has EPS of $2.50. Currently neither company has debt, and each has 1,000,000 shares of stock outstanding.

    If the merger takes place based on an exchange of stock (based on market value), which company should be the acquiring firm in order to see an increase in EPS?

    © BrainMass Inc. brainmass.com September 26, 2022, 9:07 pm ad1c9bdddf
    https://brainmass.com/business/mergers-and-acquisitions/maximizing-earnings-share-acquisition-596160

    SOLUTION This solution is FREE courtesy of BrainMass!

    The expected earnings for XYZ are $1.00 per share * 1,000,000 shares is $1,000,000. The expected earnings for ABC are $2.50 per share * 1,000,000 shares is $2,500,000. The expected earnings for the combined company is $1,000,000 + $2,500,000 = $3,500,000.

    Assume that XYZ can acquire ABC for stock in an exchange based on market value. Thus XYZ will offer one of its shares (market value of $50.00) for every two shares of ABC (market value of 2 * $25.00 = $50.00). Thus XYZ will need to issue 500,000 additional shares (1,000,000/2). After the merger there will be 1,000,000 + 500,000 = 1,500,000 shares of XYZ outstanding. The expected EPS after the merger will be $3,500,000/1,500,000 = $2.33. This is an increase for XYZ versus the EPS of $1.00 before the merger.

    Assume that ABC can acquire XYZ for stock in an exchange based on market value. Thus ABC will offer two of its shares (market value of 2 *$25.00 = $50.00) for every share of XYZ (market value of $50.00). Thus ABC will need to issue 2,000,000 additional shares (1,000,000 * 2). After the merger there will be 1,000,000 + 2,000,000 = 3,000,000 shares of ABC outstanding. The expected EPS after the merger will be $3,500,000/3,000,000 = $1.17. This is a decrease for ABC versus the EPS of $2.50 before the merger. Thus, for the acquiring firm to see an increase in EPS, XYZ has to acquire ABC.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com September 26, 2022, 9:07 pm ad1c9bdddf>
    https://brainmass.com/business/mergers-and-acquisitions/maximizing-earnings-share-acquisition-596160

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