Chat with AIExam 22: Mergers and Acquisitions
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Martin Manufacturing has earnings per share (EPS) of $3.00, 5 million shares outstanding, and a share price of $32. Martin is considering buying Luther Industries, which has earnings per share of $2.50, 2 million shares outstanding, and a share price of $20. Martin will pay for Luther by issuing new shares. There are no expected synergies from the transaction.
-Assume that Martin pays no premium to acquire Luther. Calculate Martin's price-earnings (P/E) ratio both pre and post merger.
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(Essay)
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(76) Correct Answer:
Verified
VerifiedPremerger P/E = price per share / earning price per share = $32.00 / $3 = 10.67
First, since Martin is paying for the merger with stock, the number of shares that Martin must issue
= ($2.50 × 2 million) / $32 = 1.25 million
So the total number of shares in the new merged firm
= 5 million (existing Martin shares) + 1.25 million new shares = 6.25 million shares.
Total earnings for the merged firm = Earnings from Martin + Earnings from Luther.
Earnings from Martin = EPS × shares outstanding = $3.00 × 5 million = $15 million
Earnings from Luther = EPS × shares outstanding = $2.50 × 2 million = $5 million
Total earnings = $15 + $5 = $20 million
EPS of merged firm = $20 million / 6.25 million = $3.20
Post merger P/E = Price per share / earning per share = $32 / $3.20 = $10
Savings that come from combining the marketing and distribution of different types of related products are called ________.
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(Multiple Choice)
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(89) Correct Answer:Verified
VerifiedD
Consider the following equation: 
< 
The term x in this equation refers to ________.
<
The term x in this equation refers to ________.Free
(Multiple Choice)
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(83) Correct Answer:Verified
VerifiedC
Consider two firms, Bob Company and Cat Enterprises, both with earnings of $10 per share and 5 million shares outstanding. Cat is a mature company with few growth opportunities and a stock price of $25 per share. Bob is a new firm with much higher growth opportunities and a stock price of $40 per share. Assume Bob acquires Cat using its own stock and the takeover adds no value. In a perfect capital market, how many shares must Bob offer Cat's shareholders in exchange for their shares?
(Multiple Choice)
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(93) On average, when a bid is announced, the stock price of the target drops.
(True/False)
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(86) Consider a case in which existing shareholders do not have to invest time and effort, but still participate in the gains from a takeover, while the bidder who puts in the time and effort is forced to give up substantial profits. This situation is called ________.
(Multiple Choice)
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(78) Mayo Corporation is currently trading at $30 per share. There are 10 million shares outstanding, and the company has no debt. You believe that the value of the company would increase by 50% if the management were replaced. How much would you gain from acquiring 50% of Mayo's shares by borrowing, attaching the debt to the company and replacing the management?
(Multiple Choice)
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(71) Consider the following equation: 
< 
The term S in this equation refers to ________.
<
The term S in this equation refers to ________. (Multiple Choice)
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(89) When a hostile takeover appears to be inevitable, a target company will sometimes look for another, friendlier company to acquire it called a ________.
(Multiple Choice)
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(78) A situation where every director serves a three-year term and the terms are staggered so that only one-third of the directors are up for election each year is called a ________.
(Multiple Choice)
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(76) Which of the following statements regarding mergers and diversification is FALSE?
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(87) Which of the following statements regarding poison pills is FALSE?
(Multiple Choice)
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(84) The fact that a large company can enjoy savings from producing goods in high volume that are not available to a small company is called ________.
(Multiple Choice)
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(82) Which of the following statements regarding vertical integration is FALSE?
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