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    Mergers and acquisitions

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    Connor Shoe Company is contemplating the acquisition of Salinas Boots, a firm that has shown large operating tax losses
    over the past few years. As a result of the acquisition, Connors believes that the total pretax profits of the merger will not change
    from their present level for 15 years. The tax loss carry-forward of Salinas is $800,000. and the Connors projects that its annual
    earnings before taxes will be $280,000 per year for each of the next 15 years. These earnings per are assumed to fall
    within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed merger. The firm
    is in the 40% tax bracket.

    A. If the Connors does not make the acquistion, what will the company's tax liability and earnings after taxes each year
    over the next 15 years?

    B. If the acquisition is made, what will be the company's tax liability and earnings after taxes each year over the next
    15 years?

    C. If Salinas can be acquired for $350,000 in cash, should Connors make the acquisition, judging on the basis of
    tax considerations?(Ignore Present Value)
    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 stock for each of Mayer Stock. Henry Company expects its stock to sell
    at the same price/earnings multiple after the merger as before merging.

    Earninngs 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 and price/earnings ratio for each company

    C. Calculate the price/earnings ratio used to purchase Mayer Services

    D. Calculate the postmerger earnings per share 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.

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    Solution Summary

    The solution explains how to determine the tax liability in an acquisition and the post merger earnings per share