The following data on a merger is given: $$\begin{array} { l c l l }
& \text { Firm A } & \text { Firm B Firm AB } \
\text { Price per share } & \$ 100 & \$ 10 & \
\text { Total earnings } & \$ 500 & \$ 300 & \
\text { Shares outstanding } & 100 & 40 & \
\text { Total value } & \$ 10,000 & \$ 400 & \$ 11,000
\end{array}$$
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.What will be the postmerger price per share for Firm A's stock if Firm A pays in cash?
A)$108
B)$110
C)$102
D)$114

Question

The following data on a merger is given: $$\begin{array} { l c l l } 
& \text { Firm A } & \text { Firm B Firm AB } \
\text { Price per share } & \$ 100 & \$ 10 & \
\text { Total earnings } & \$ 500 & \$ 300 & \
\text { Shares outstanding } & 100 & 40 & \
\text { Total value } & \$ 10,000 & \$ 400 & \$ 11,000
\end{array}$$
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.What will be the postmerger price per share for Firm A's stock if Firm A pays in cash?
A)$108
B)$110
C)$102
D)$114

Quizplus · Accepted Answer

First, we need to calculate how many shares Firm A will acquire from Firm B. Firm B has 40 shares outstanding, and they will be bought at a price of $20 per share, so Firm A will pay a total of $800 to purchase all of Firm B's shares.

Next, we need to calculate the new earnings and shares outstanding for the merged company, which we will call Firm AB. The total earnings for Firm AB will be the sum of the earnings for Firm A and Firm B before the merger, which is $500 + $300 = $800. The total shares outstanding will be the sum of the shares outstanding for Firm A and the shares acquired from Firm B, which is 100 + 40 = 140.

Now we can calculate the postmerger price per share for Firm A's stock. The total value of the merged company (Firm AB) is given as $11,000. Since we know the total earnings and the total shares outstanding, we can calculate the earnings per share (EPS) for the merged company:

EPS = Total earnings / Total shares outstanding = $800 / 140 = $5.71

We also know that the value of Firm B's shares (which Firm A just bought for $800) is included in the total value of the merged company, so we need to subtract that value from $11,000 to find the new value for Firm A's shares. The new value for Firm A's shares is:

$11,000 - $800 = $10,200

Finally, we can divide the new value for Firm A's shares by the number of shares outstanding for Firm A to find the postmerger price per share:

Postmerger price per share = New value for Firm A's shares / Shares outstanding for Firm A 
= $10,200 / 100 = $102

Therefore, the answer is C) $102.

The Following Data on a Merger Is Given Firm a Has Proposed to Acquire Firm B at a l