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a.
To determine: The EPS of the merged firm.
a.
![Check Mark](/static/check-mark.png)
Answer to Problem 5QP
The EPS of the merged firm is $4.20.
Explanation of Solution
Determine the EPS and total earnings of Company CS
Therefore, the EPS is $4 and total earnings is $8,000,000.
Determine the EPS and total earnings of Company FF
Therefore, the EPS is $2.50 and total earnings is $2,500,000.
Determine the EPS of the merged firm
Therefore, the EPS of merged firm is $4.20.
b.
To determine: The price per share of Company CS.
b.
![Check Mark](/static/check-mark.png)
Answer to Problem 5QP
The price per share of Company CS is $40.
Explanation of Solution
Determine the price per share of Company CS
Therefore, the price per share of Company CS is $40.
c.
To discuss: The demonstration of Company CS or Company FF realize any change in wealth.
c.
![Check Mark](/static/check-mark.png)
Answer to Problem 5QP
The value of Company CS and Company FF is Unchanged.
Explanation of Solution
- Company FF have a stock worth of $20,000,000 ($40*500,000 shares), so the wealth of Company FF is unchanged.
- The wealth of Company CS is also unchanged.
Therefore, the value of Company CS and Company FF is Unchanged.
d.
To determine: The P/E ratio of new firm if there are no economic gains.
d.
![Check Mark](/static/check-mark.png)
Answer to Problem 5QP
The P/E ratio of new firm if there are no economic gains is 9.52.
Explanation of Solution
Determine the P/E ratio of new firm if there are no economic gains
The P/E ratio of the merged firm is between the P/E ratio of the two firms.
Therefore, the P/E ratio of new firm if there are no economic gains is 9.52.
e.
To determine: The price per share of Company CS.
e.
![Check Mark](/static/check-mark.png)
Answer to Problem 5QP
The price per share of Company CS is $42.
Explanation of Solution
If the P/E ratio of Company CS remains constant at 10, then the merged firm will the share price at $42 per share ($4.20*10). This will result in an increase in the firm value to $105,000,000 ($42*2,500,000).
Therefore, price per share of Company CS is $42.
f.
To determine: The gains from the merger split between shareholders of the two firms.
f.
![Check Mark](/static/check-mark.png)
Answer to Problem 5QP
The gain of Company CS is $4,000,000 and Company CS is $1,000,000.
Explanation of Solution
Determine the gain of Company CS and Company FF
Therefore, the gain of Company CS is $4,000,000 and Company CS is $1,000,000.
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Chapter 21 Solutions
FUNDAMENTALS OF CORPORATE FINANCE
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
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