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Price to earnings ratio calculations

Foster Corp is considering the acquisition of Regis Corp. Foster has 2 million shares outstanding selling at $30 (or 7.5 times its earnings per share) Regis has 1 million shares outstanding selling at $15 (or 5 times its earnings per share) Fosters would offer to exchange 2 shares of Regis Corp. for 1 share of Foster Corp.

1: With no wealth created, what is the earnings per share of the merged company. Its share price? Its price to earnings ratio. Would there be any wealth transfer between the two companies?

2: Lets say that after the merger, the market would not adjust the price to earnings ratio of Foster Cropt, which stays at 7.5. What is the new share price of the merged company? Would there be any wealth transfer between the two companies?

Solution Preview

1) For Foster
EPS= Price / PE ratio =30/7.5=$4.00
Total earnings=EPS* number of shares = $4.00*2 million = 8.00 million
Market Capitalization = Price * number of shares = 30*2 million = 60 million

For Regis
EPS= Price / PE ratio =15/5=$3.00
Total earnings=EPS* number of shares = $3.00*1 million = 3.00 million
Market Capitalization = Price * number of shares = 15*1 million = 15 million

Merged Company
Total earnings = Foster ...

Solution Summary

This solution provides calculations for price to earnings ratios.

$2.19