Ratio of exchange and EPS Marla’s Cafe is attempting to acquire the Victory Club. Certain financial data on these corporations are summarized in the following table.
Item
Marla’s Cafe
Victory Club
Earnings available for common stock
$20,000
$8,000
Number of shares of common stock outstanding
20,000
4,000
Market price per share
$12
$24
Marla’s Cafe has sufficient authorized but unissued shares to carry out the proposed merger.
a. If the ratio of exchange is 1.8, what will be the earnings per share (EPS) based on the original shares of each firm?
b. Repeat part a if the ratio of exchange is 2.0.
c. Repeat part a if the ratio of exchange is 2.2.
d. Discuss the principle illustrated by your answers to parts a through c.
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