# GAF 760 EXERCISE QUESTIONS – Solutions Below are structured solutions to the main questions from your image. --- ## **QUESTION 1** ### **Premerger Data** | | Firm A | Firm B | |-----------------|------------|----------| | Total earnings | K9,000 | K6,600 | | Shares outstd. | 5,000 | 2,200 | | Price/share | K400 | K150 | **Assume:** Firm A acquires Firm B via an exchange of stock at K200 per share of B. --- ### **a) EPS of Firm A after the merger** #### **Step 1: Calculate total value paid for B** - Firm B shares = 2,200 - Price per B share = K200 - **Total value paid** = 2,200 × K200 = **K440,000** #### **Step 2: New shares issued by A to B's shareholders** - Price per A share = K400 - Shares issued = Total value paid / Price per A share = 440,000 / 400 = **1,100 shares** #### **Step 3: Total shares outstanding after merger** - Pre-merger A shares = 5,000 - New shares issued = 1,100 - **Total = 6,100 shares** #### **Step 4: Total earnings after merger** - A + B = 9,000 + 6,600 = **K15,600** #### **Step 5: EPS after merger** \[ \text{EPS} = \frac{\text{Total Earnings}}{\text{Total Shares}} = \frac{15,600}{6,100} = K2.56 \] --- ### **b) Price per share after merger if P/E ratio is unchanged** - **A’s original P/E** = Price / EPS = 400 / (9,000/5,000) = 400 / 1.8 = **222.2** - **EPS after merger** = K2.56 (from above) - If P/E remains **222.2**: \[ \text{Price per share} = \text{P/E} \times \text{EPS} = 222.2 \times 2.56 = K568.9 \] --- ### **c) Post-merger P/E if market correctly analyzes with no synergy** - Total value of A pre-merger: 5,000 × 400 = **K2,000,000** - Total value paid for B: **K440,000** - **Total market value post-merger**: K2,000,000 + K440,000 = **K2,440,000** - Total shares after merger: **6,100** \[ \text{Price per share post-merger} = \frac{2,440,000}{6,100} = K400 \] \[ \text{P/E post-merger} = \frac{400}{2.56} = 156.25 \] #### **Interpretation** - **Share price is K400** (same as pre-merger A). - **P/E drops** because the market realizes no synergy and A overpaid relative to B's market price (paid K200/share vs. B's market price K150/share). - **A overpaid** for B as the share price does not increase. If synergy existed, price would rise. --- ## **QUESTION 2** ### **Given Data** | | Harris | Logo | |--------------|-----------|----------| | Net income | K500,000 | K165,000 | | Shares | 100,000 | 25,000 | | Price/share | K35 | K40 | --- ### **a) Exchange ratio of market prices** \[ \text{Exchange ratio} = \frac{\text{Logo Price}}{\text{Harris Price}} = \frac{40}{35} = 1.143 \] But Harris offers **1.6 shares** for each Logo share. --- ### **b) EPS and P/E ratio for each company** - **EPS (Harris):** \( \frac{500,000}{100,000} = K5 \) - **EPS (Logo):** \( \frac{165,000}{25,000} = K6.60 \) - **P/E (Harris):** \( 35 / 5 = 7 \) - **P/E (Logo):** \( 40 / 6.60 = 6.06 \) --- ### **c) Expected market price per share of merged company** **Shares issued to Logo:** - 25,000 Logo × 1.6 = **40,000 new shares** - **Total shares post-merger = 100,000 + 40,000 = 140,000** **Total earnings post-merger = 500,000 + 165,000 = 665,000** **EPS post-merger:** \[ \text{EPS} = \frac{665,000}{140,000} = K4.75 \] If Harris P/E remains 7: \[ \text{Price per share} = 4.75 \times 7 = K33.25 \] --- ## **QUESTION 3** ### **(a) Toots plc and Beans Ltd** #### **Toots plc:** - Shares: 2,000,000 - Net assets: K2,500,000 - Earnings: K1,500,000 - P/E: 8 #### **Beans Ltd:** - Shares: 1,000,000 - Net assets: K3,500,000 - Earnings: K400,000 **Toots offers K4/share to Beans shareholders:** - Shares acquired = 1,000,000 - Total value = 1,000,000 × 4 = K4,000,000 **New Toots shares issued = 4,000,000 / 4 = 1,000,000** **Total shares after merger = 2,000,000 + 1,000,000 = 3,000,000** **Combined earnings:** 1,500,000 + 400,000 = K1,900,000 **Combined assets:** 2,500,000 + 3,500,000 = K6,000,000 **Earnings/share (pre):** 1,500,000 / 2,000,000 = **K.75** **Earnings/share (post):** 1,900,000 / 3,000,000 = **K.63** **Assets/share (pre):** 2,500,000 / 2,000,000 = **K1.25** **Assets/share (post):** 6,000,000 / 3,000,000 = **K2.00** --- ### **(b) AAA Ltd and BBB Ltd** | | AAA Ltd | BBB Ltd | |----------------|---------|---------| | P/E ratio | 5.00 | 20. | | Shares outstd. | 60,000 | 170,000 | | Earnings | 300,000 | 675,000 | **Exchange:** 1 BBB share for 3 AAA shares. **AAA shares = 60,000, so new BBB shares issued = 60,000 / 3 = 20,000** **Total BBB shares post-merger = 170,000 + 20,000 = 190,000** **Total earnings post-merger = 675,000 + 300,000 = 975,000** **EPS post-merger:** \[ \text{EPS} = \frac{975,000}{190,000} = K5.13 \] **PE post-merger:** - If share price unchanged, BBB’s price = (20 × (675,000 / 170,000)) = 20 × 3.97 = K79.4 - New PE = 79.4 / 5.13 = **15.48** --- ## **QUESTION 4** (Same as Q1, already answered above.) --- ### **If you need more detailed breakdowns or explanation for any part, let me know!**