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Romer company will acquire all the outstanding stock of Dayton co through an exchange of stock. Romer is offering$65.00per share for Dayton.
Information for 2compamies is as follows.Net income of romer $50000 and Dayton is $10000.
Shares outstanding:romer5000 and Dayton 2000.
EPS:romer$10 and Dayton$5
Market price of stock: $150romer
P/E ratio romer is 15required
A) calculate the shares to be issued by romer
B ) calculate combined EPS
C) calculate P/E ratio paid:price offered/EPS of target
D) compare P/E ratio paid to current P/E RATIO
E) Calculate maximum price before dilution of EPSSir it would be really nice if you could elaborate (with formula, steps) to answer .very confusing to understand what exactly they are asking in question and how to proceed ?
Thanks in advanceI am puzzled as to why it is you find it confusing as to what is being asked in the question, because all that is needed is understanding of what is meant by EPS and PE ratio. You should be more than happy with both terms from my free lectures and from your previous studies. In addition you must surely have an answer in the same book in which you found the question, and so in future ask about whatever it is in the answer that you are not clear about rather than simply expecting me to type out an answer.
A) The current total amount be paid for the shares in Dayton is 2,000 x $65. They are being given shares in Romer that have a value of $150 each, and therefore Romer will issue
(2,000 x 65) / 150 = 867 shares.B) The new total earnings of the Romer will be 50,000 + 10,000 = $60,000. The new number of shares in issue will be 5,000 + 867 = 5,867. Therefore the new EPS will be 60,000 / 867 = $10.23.
C) Romer is paying $65 per share for Dayton and the EPS of Dayton is $5 per share. Therefore the PE ratio from this is 65/5 = 13.
D) The current PE ratio of Romer is 150/10 = 15 (which is higher than the 13 in part C. (Therefore the new EPS is increasing rather than diluting)
E) In order for the PE to be maintained at at least 15 (and so no dilution/reduction in the EPS), they would need to pay for Dayton on the basis of a PE of at least 15. Given that Dayton’s EPS is $5, this would mean paying a maximum of 5 x $15 = $75 per share.
Thanks so much sir. Sure I will be specific to my doubts from next post
Thanks a million.
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