Question

Consider two firms that both have earnings of $4 per share. The first firm, OldWorld Enterprises, is a mature company with few growth options. It has 750,000 shares outstanding and a price of $30 per share. The second firm, NewWorld Corporation, is a young company with many growth opportunities. It also has 500,000 shares outstanding, but a higher price of $50 per share. Assume capital markets are perfect, the takeover adds no value, and NewWorld acquires OldWorld using its own stock. What are NewWorld's earnings per share after the acquisition?

Answer 1

After acquiring Old-world Enterprises, NewWorld Corporation will have earnings per share of $2.40.

Step-by-step explanation:

In the given scenario, Newsworld Corporation acquires Old-world Enterprises using its own stock. Since Old-world has earnings of $4 per share and 750,000 shares outstanding, its total earnings are $4 * 750,000 = $3,000,000. After the acquisition, Newsworld Corporation will have a total of 750,000 + 500,000 = 1,250,000 shares outstanding. Therefore, Newsworld's earnings per share after the acquisition will be $3,000,000 / 1,250,000 = $2.40 per share.