Bootst r ap Gam e . The Muck and Slurry merger has fallen through (see Section 6.3). But World

QUESTION

Bootst r ap Gam e . The Muck and Slurry merger has fallen through (see Section 6.3). But World Enterprises is determined to report earnings per share of $2.67. It therefore acquires the Wheelrim and Axle Company. You are given the following facts: W o r ld Ente r prises Wheelrim and Axle Me r g ed Firm Earnings per share $2.00 $2.50 $2.67 Price per share $40.00 $25.00 Price-earnings ratio 20 10 Number of shares 100,000 200,000 Total earnings $200,000 $500,000 Total market value $4,000,000 $5,000,000 Once again there are no gains from merging. In exchange for Wheelrim and Axle shares, World Enterprises issues just enough of its own shares to ensure its $2.67 earnings per share objective. a. Complete the above table for the merged firm. b. How many shares of World Enterprises are exchanged for each share of Wheelrim and Axle? c. What is the cost of the merger to World Enterprises? d. What is the change in the total market value of those World Enterprises shares that were outstanding before the merger?
Solution: a) World Wheel rim and Axle Merged Workings Enterprises Firm Earnings per share 2 2.5 2.67 Given Price per share 40 25 34.33 9000000/262172 Price-earnings ratio 20 10 12.86 34.33/2.67 Number of shares 1,00,000 2,00,000 2,62,172 700000/2.67 Total earnings 200000 500000 7,00,000.00 200000+500000 Total market value 4000000 5000000 90,00,000.00 4000000+5000000 b) Per share exchange = Aditional sahres / Shares of Wheelrim = 162172 / 200000 = 0.81 share of World Enterprises are exchanged for each share of Wheelrim and Axle c) Cost of

r = Value of shares given to Wheelrim Value of Wheelrim = (162172 * 34.33) 5000000 = 567365 d) Change in the total market value of those World Enterprises shares that were outstanding before the merger: = No of sahres outstanding before merger * (Price after merger Price before merger) = 100000 * (34.33 40) = (-) 567000 [ Market value has fallen by 567000]

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