Question

Essex Industries is considering the acquisition of Twinsburg Company in a stock-for-stock exchange. The following financial data are available on both companies. (Assume no synergy is expected with this merger.) Calculate answers to nearest 0.001. Essex Twinsburg Sales $500 million $50 million Net income $40 million $3.74 million Common shares outstanding 5 million 1 million Earnings per share $8.00 $3.74 Dividends per share $3.00 $1.00 Common stock market price $64 $24 Price/earnings ratio 8 6.42 Calculate the post-merger earnings per share if the exchange ratio is 0.4 shares of Essex for each share of Twinsburg. (Assume total post-merger earnings are $43,740,000.)A) $8.10

B) $7.33
C) $7.29
D) $7.42

Answer 1

The post-merger earnings per share after Essex Industries acquires Twinsburg Company, given an exchange ratio of 0.4 and total post-merger earnings of $43,740,000, is $8.10.

Step-by-step explanation:

The post-merger earnings per share (EPS) can be calculated using the total earnings post-merger and the new number of shares outstanding after the merger. Essex offers 0.4 shares for each Twinsburg share, so post-merger, Essex will issue 0.4 shares × 1 million = 400,000 new shares for Twinsburg. The new total number of shares will be 5 million + 400,000 = 5.4 million shares. The total post-merger earnings are given as $43,740,000. Therefore, the post-merger EPS = $43,740,000 / 5.4 million shares = $8.10.

Answer 2

The correct option is A,$8.10

Step-by-step explanation:

The post merger earnings per share of the combined business is the post merger earnings divided by the post merger weighted average number of shares .

Post merger earnings is $43,740,000

Post merger number of shares is combination of Essex shares before merger plus the equivalent shares given to Twinsburg shareholders in the new company.

Essex shares 5,000,000

Twinsburg(0.4/1*1,000,000) 400,000

Total post merger shares 5,400,000

Earnings per share post merger= $43,740,000/5,400,000=$8.10

The correct option is A.