The following information relates to two companies – A and B:
company A – earnings after tax 210 000 $, P/E 16
company B – earnings after tax 900 000 $, P/E 21
Bs management estimate that if they were to acquire A they could save 100 000 $ annually after tax on administrative costs in running the new joint company. Additionally, they estimate that the P/E ratio of the new company would be 18. Corporate tax rate is 18%
On the basis of these estimates, what is the maximum that the shareholders of B should pay for the entire share capital of A?