Reference no: EM132766968

Question - The Jeter Corporation is considering acquiring the A-Rod Corporation. The data for the two companies are as follows:

A-Rod Corporation Jeter Corporation

Total earnings $1,000,000 $4,000,000

Number of shares of stock outstanding 400,000 2,000,000

EPS $2.50 $2.00

P/E ratio 12 15

Market price per share $30 $30

a. The Jeter Corp. is going to give A-Rod Corp. a 60 percent premium over A-Rod Corp.'s current market value. What price will it pay?

b. At the price computed in part a, what is the total market value of A-Rod Corp.?

c. At the price computed in part a, what is the P/E ratio Jeter Corp. is assigning to A-Rod Corp.?

d. How many shares must Jeter Corp. issue to buy the A-Rod Corp. at the total value computed in part b?

e. Given the answer to part d, how many shares will Jeter Corp. have after the merger?

f. Add together the total earnings of both corporations and divide by the total number of shares computed in part e. What are the new postmerger EPS?

2. Dr. Payne helped start Surgical Inc. 15 years ago. At the time, he purchased 200,000 shares of stock at one dollar per share. In 20XX, he has the opportunity to sell his interest in the company to Medical Technology for $40 a share. His marginal tax rate would be 28 percent. Assume a capital gain exemption limit of $500,000 is available.

a. If he sells his interest, what will be the value for before-tax profit, taxes, and after tax profit?

b. Assume, instead of cash, he accepts stock valued at $40 per share. He holds the stock for five years and then sells it for $72.50 (the stock pays no cash dividends). What will be the value for before-tax profit, taxes, and after tax profit? (Enter all values as positive value.)

c. Using an 11 percent discount rate, what is the present value of the after-tax profit figure in part b to part a?