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Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction. Assume Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Associated Steel.How many new shares Rearden needs to issue to pay for this deal?What is the exchange ratio?What will be the price per share of the combined corporation after the merger?What will be the price per share of the Rearden immediately after the announcement?What will be the price per share of the Associated Steel immediately after the announcement?

Respuesta :

Answer and Explanation:

The computation is shown below

Current price = $15

Premium = $15 × 20% = $3

Offer price = $15 + $3 = $18

The value of associated steel = $18 × 4 million shares = $72

a. The number of new shares would be

= $72 ÷ $20

= 3.6

b. The exchange ratio is

= $18 ÷ $20

= 0.9

c. Price per share after the merger is

= ((20 × 10) +  (15 × 4)) ÷ (10 + 3.6)

= $19.12

d. Price per share after the annoucement is $19.12

e. Price of associated steel is

= 19.12 × 0.90

= $17.21

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