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Hello Sir can you please explain how exactly do we calculate no. of shares in this ques? and what exactly is happening it’s kind of confusing….
Peter plc has made an offer of one of its shares for every three of Baker plc. Synergistic
benefits from the merger would result in an increase in after-tax earnings of $4m per
annum. Extracts from the latest accounts of both companies are as follows:
……………………………………..Peter plc …. Baker plc
Profit after tax……………….. $120m…………. $35m
Number of shares………….. 400 million….. 90 million
Market price of shares ……..250p …………..120p
Assume that the price of Peter plc’s shares rises by 50c after the merger and that Peter
issues new shares as consideration.
What will be the price-earnings ratio of the group?Peter is buying Baker. They will issue 90/3 = 30m new shares and so the total number of shares in Peter will now be 400 + 30 = 430m. The existing shares in Baker are cancelled, Baker no longer exists.
The new total earnings will be 120 + 35 + 4 = 159m so the new earnings per share is 159/430 = $0.37.
The new market value of shares in Peter is 250 + 50 = $3.00
Therefore the PE ratio will be 3.00/0.37.
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