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.
-If Rearden offers an exchange ratio such that,at current pre-announcement share prices for both firms,the offer represents a 20% premium to buy Associated Steel,then Rearden's earnings per share after the merger will be closest to:
A)$1.84.
B)$1.90.
C)$2.00.
D)$2.25.

Question

Quizplus · Accepted Answer

- Before the merger:
Rearden's earnings per share = $2
Associated Steel's earnings per share = $1.25
- Rearden will pay a 20% premium to acquire Associated Steel, which means they will offer $18 per share ($15 x 1.2) in exchange for Associated Steel's shares.
- The number of new shares that Rearden will issue can be calculated as follows:
Number of new Rearden shares issued = (Price offered by Rearden / Current market price of Rearden) x Number of shares of Associated Steel
Number of new Rearden shares issued = ($18 / $20) x 4 million = 3.6 million
- After the merger:
Total earnings of the merged company = Earnings of Rearden + Earnings of Associated Steel = $20 million ($2 x 10 million + $1.25 x 4 million)
Total number of shares outstanding after the merger = Number of shares of Rearden + Number of new Rearden shares issued = 13.6 million (10 million + 3.6 million)
Earnings per share of the merged company = Total earnings of the merged company / Total number of shares outstanding after the merger = $1.84 ($20 million / 13.6 million)
Therefore, the answer is A) $1.84.

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