Progressive Ltd is determined to increase its earnings per share from $1 to $1.33, so it acquires Lo-Gear. The following facts are provided:
Item Progressive Lo-Gear Merged company
Earnings per share ($) 1.00 1.25 1.33
Price per share ($) 20.00 12.50 ?
Price-earnings ratio 20.00 10.00 ?
Number of shares 100000 200000 ?
Total earnings ($) 100000 250000 ?
Total market value ($) 2 000000 2500000 ?
There are no economic benefits from combining the two companies. In exchange for Lo-Gear's shares, Progressive issues just enough of its own shares to ensure its $1.33 earnings-per-share objective.
Please provide answers with explanation.
1. Calculate the number of shares of the merged company.
2. How many shares of Progressive are exchanged for each share of Lo-Gear?
3. What is the net cost of the takeover to Progressive?