) Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which has earnings per share...

) Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction. Assume Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Associated Steel.

1. How many new shares Rearden needs to issue to pay for this deal?


2. What is the exchange ratio?


3. What will be the price per share of the combined corporation after the merger?


4. What will be the price per share of the Rearden
   immediately
   after the announcement?


5. What will be the price per share of the Associated Steel
   immediately
   after the announcement?


6. What is the actual premium Rearden will pay?


7. Is this an accretive or dilutive deal?


8. Compare the PE ratio before and after acquisition for Rearden. How does the change in PE ratio relates to your answer to the previous question?