Pay for the entire share capital

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Reference no: EM131359060

The following information relates to two companies – A and B:

company A – earnings after tax 210 000 $, P/E 16

company B – earnings after tax 900 000 $, P/E 21

Bs management estimate that if they were to acquire A they could save 100 000 $ annually after tax on administrative costs in running the new joint company. Additionally, they estimate that the P/E ratio of the new company would be 18. Corporate tax rate is 18%

On the basis of these estimates, what is the maximum that the shareholders of B should pay for the entire share capital of A?

Reference no: EM131359060

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