If Martin pays no premium to acquire Luther, what will the earnings per share be after the merger?
Use the information for the question(s) below.
Martin Manufacturing has earnings per share (EPS) of $3.00, 5 million shares outstanding, and a share price of $32. Martin is considering buying Luther Industries, which has earnings per share of $2.50, 2 million shares outstanding, and a share price of $20. Martin will pay for Luther by issuing new shares. There are no expected synergies from the transaction.
Answer: First, since Martin is paying for the merger with stock, the number of shares that Martin must issue:
= ($2.50 × 2 million) / $32 million = 1.25 million
So the total number of shares in the new merged firm
= 5 million (existing Martin shares) + 1.25 million new shares = 6.25 million shares.
Total earnings for the merged firm = Earnings from Martin + Earnings from Luther.
Earnings from Martin = EPS × shares outstanding = $3.00 × 5 million = $15 million
Earnings from Luther = EPS × shares outstanding = $2.50 × 2 million = $5 million
Total earnings = $15 + $5 = $20 million
EPS of merged firm = $20 million / 6.25 million = $3.20
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