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N 5, I 12%, PMT $50,000
P r i c e p a i d p e r s h a r e $ 2 4 . 0 0
/ p a i d = = = 1 2 . 0
E P S o f t a r g e t $ 2 . 0 0
P E
(3) Price paid per share: $12.00 2.2 $26.40
P r i c e p a i d p e r s h a r e $ 2 6 . 4 0
/ p a i d = = = 1 3 . 2
E P S o f t a r g e t $ 2 . 0 0
P E
When the P/E paid (10.8) is less than the P/E of the acquiring firm (12.0), as in part a, the EPS of
the acquiring firm increases, and the EPS of the target firm decreases.
When the P/E paid (12.0) is the same as the P/E of the acquiring firm (12.0), as in part b, the EPS
of the acquiring and target firms remain the same.
When the P/E paid (13.2) is more than the P/E of the acquiring firm (12.0), as in part c, the EPS of
the acquiring firm decreases, and the EPS of the target firm increases.
P18-8. EPS and merger terms
LG 3; Challenge
a. 20,000 0.4 8,000 new shares
b. ($200,000 $50,000) ¸ 58,000 $4.31 per share
c. $4.31 0.4 $1.72 per share
d. $4.31 $4.00 $0.31. The P/E paid (12.5 $0.4 $5), which is less than the P/E of
acquired firm.
P18-9. Ratio of exchange
LG 3; Intermediate
Case Ratio of Exchange Market Price Ratio of Exchange
A$ 30 ¸ $50 0.60 ($50 0.60) ¸ $25 1.20
B$ 100 ¸ $80 1.25 ($80 1.25) ¸ $80 1.25
C$ 70 ¸ $40 1.75 ($40 1.75) ¸ $60 1.17
D$12.50 ¸ $50 0.25 ($50 0.25) ¸ $10 1.25
E$ 25 ¸ $25 1.00 ($25 1.00) ¸ $20 1.25
The ratio of exchange of shares is the ratio of the amount paid per share of the target firm to the market
price of the acquiring firm’s shares. The market price ratio of exchange indicates the amount of
additional money paid by the acquiring firm for every $1.00 of the acquired firm.
P18-10. Expected EPS—merger decision
LG 3; Challenge
a. Graham & Sons—Premerger
Year Earnings EPS
2016 $200,000 $2.000
2017 $214,000 $2.140
2018 $228,980 $2.290
2019 $245,009 $2.450
2020 $262,160 $2.622
2021 $280,511 $2.805
