Big Co. would like to buy Small Co. for a 30% control premium. Currently Big Co.’s stock price is $28.32, its EPS is $2.48 and it has 103mm shares outstanding. Currently Small Co.’s stock price is $24.59 (before premium), its EPS is $1.78 and it has 21.5mm shares outstanding. Big Co.’s cost of debt is 5% and its tax rate is 40%. If Big Co. uses stock to acquire Small Co., what amount of pre-tax synergies are required for Big Co. to breakeven on an EPS basis? If Big Co. uses debt to acquire Small Co. what would Big Co.'s proforma EPS be?

Big Co. would like to buy Small Co. for a 30% control premium. Currently Big Co.’s stock price is $28.32, its EPS is $2.48 and it has 103mm shares outstanding. Currently Small Co.’s stock price is $24.59 (before premium), its EPS is $1.78 and it has 21.5mm shares outstanding. Big Co.’s cost of debt is 5% and its tax rate is 40%. If Big Co. uses stock to acquire Small Co., what amount of pre-tax synergies are required for Big Co. to breakeven on an EPS basis? If Big Co. uses debt to acquire Small Co. what would Big Co.'s proforma EPS be?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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