Question

Your company has earnings per share of $ 4.19. It has 1.9 million shares​ outstanding, each of which has a price of $59. You are thinking of buying​ TargetCo, which has earnings per share of $ 2.10, 1.9 million shares​ outstanding, and a price per share of $ 21.You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. If companies in the same industry as TargetCo are trading at multiples of 12 times​earnings, what would be one estimate of an appropriate premium for​TargetCo?

TargetCo has $2.10 in​ earnings, so if other companies in its industry are trading at 12 times​ earnings, then a starting point for a valuation of TargetCo in this transaction might be ________ per​share, implying a _________ premium

Answer 1

If the current earnings per share of TargetCo. are $2.10, and the times earnings multiple is 12, the relative valuation should result in a $2.10 x 12 = $25.20 per stock. This means that the premium per stock = $25.20 - $21 = $4.20, and the total premium paid for all the 1.9 million shares = $7.98 million.