1. Imagine that 2 companies, A and B, have the following financial data:
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COMPANY A
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COMPANY B
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Present Earnings
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$30,000,000
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20,000,000
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Shares outstanding
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$8,000,000
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4,000,000
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Earnings per share
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$3.75
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$5.0
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Price per share
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$50
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$30
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Price earnings ratio
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$?
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$?
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(a) What is the price earnings ratio for both companies? Suppose Company A offers to buy Company B for $40 per share, compute the exchange ratio, shares from exchange, the shares that will be outstanding, and the new earnings per share.
(b) Explain why the acquisition may or may not be strategic and beneficial to the shareholders of Company A. (c) Briefly discuss some measures that can be used to repel the acquisition attempt if the management of Company B is not in favor of the acquisition. (You may cite cases covered in class or your notes.