Expected EPS—Merger decision At the end of 2012, Lake Industries had 80,000 shares of common stock outstanding and had earnings available for common of $160,000. Butler Company, at the end of 2012,...

Expected EPS—Merger decision At the end of 2012, Lake Industries had 80,000 shares of common stock outstanding and had earnings available for common of $160,000. Butler Company, at the end of 2012, had 10,000 shares of common stock outstanding and had earned $20,000 for common shareholders. Lake’s earnings are expected to grow at an annual rate of 5%, and Butler’s growth rate in earnings should be 10% per year.

a. Calculate earnings per share (EPS) for Lake Industries for each of the next 5 years (2013–2017), assuming that there is no merger.

b. Calculate the next 5 years’ (2013–2017) earnings per share (EPS) for Lake if it acquires Butler at a ratio of exchange of 1.1.

c. Compare your findings in parts a and b, and explain why the merger looks attractive when viewed over the long run.