Acme Alarm Systems
Case 31
Merger Terms and Stock Price
Purpose: The case is structured so that the student can analyze the effect of a merger on earnings per
share and stock price. In doing the analysis, the student will see that a high premium over market value
for a target company will dilute earnings per share. The question then becomes, will there be a
potentially higher P/E ratio for the acquiring company due to improved growth prospects? Also, what
part will synergy play in the analysis?
Relation to Text: The case should follow Chapter 20.
Complexity: The case is moderately complex. It should require 45 minutes to an hour.
Solutions
2. New stock price.
EPS $ 2.11
3. New earnings per share.
$60 million x 1.10 = $66 million new total earnings.
4. New price per share for Internet Security.
Internet Security’s current price $30
Number of premerger Acme shares that must be issued.
New total price $384 million
New stock price
New EPS $2.23