Use the following information to answer the question(s)below.
Rearden Metal has earnings per share of $2.It has 10 million shares outstanding and is trading at $20 per share.Rearden Metal is thinking of buying Associated Steel,which has earnings per share of $1.25,4 million shares outstanding,and a price per share of $15.Rearden Metal will pay for Associated Steel by issuing new shares.There are no expected synergies from the transaction.
-What is Rearden's earnings per share after the takeover?
A)$1.85
B)$1.92
C)$2.00
D)$2.25

Question

Quizplus · Accepted Answer

Before the takeover, Rearden Metal has a total earnings of 2 x 10 million = $20 million.
After the takeover, Rearden Metal will issue additional shares to purchase Associated Steel, so the number of outstanding shares will increase. The number of new shares needed is (4 million x $15) / $20 = 3 million shares.
Therefore, the total number of outstanding shares after the takeover is 10 million + 3 million = 13 million shares.
The total earnings after the takeover is $20 million + (1.25 x 4 million) = $25 million.
The new earnings per share for Rearden Metal would then be $25 million / 13 million shares = $1.92.

Answer: B) $1.92
 Based on the given information, there are no expected synergies from the transaction, thus the acquisition does not increase the earnings of the company. Instead, the number of outstanding shares increases due to the issuance of new shares. This would lead to a dilution in earnings per share. Therefore, the best choice would be for Rearden Metal to not pursue the acquisition of Associated Steel.

Use the Following Information to Answer the Question(s)below