After Analyzing the Particulars of Firms a and B and Their

question 6

Essay

After analyzing the particulars of firms A and B and their proposed merger, comment on the desirability of the merger:
A. The merged firms are expected to be worth $26,000. Be sure to mention EPS of the merged entity, and so on.
From the value of the merged firms, it can be seen that this merger has no expected synergies. Namely, the sum of the premerger values is equal to the postmerger value. After the merger, there will be 1,625 shares of the new stock outstanding, and total earnings should be $4,000, which is precisely the previous sum of earnings. However, now the earnings per share are $2.46, which appears attractive relative to either of the previous EPS amounts. The P/E ratio should be 6.5, which is between the firms' previous P/Es. It may be possible to fool some investors; however, this merger does not appear to have accomplished anything of financial consequence, and represents an example of the bootstrap effect.

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Definitions:

MC < MR

This indicates a scenario in economic theory where the marginal cost of producing an additional unit is less than the marginal revenue gained from selling that unit.

Monopolistic Competition

A market structure characterized by many firms selling similar but not identical products, allowing for some degree of market power and product differentiation.

Monopolistic Competition

An industry setup where numerous companies offer products that are alike but not exactly the same, providing a certain level of influence over the market.

Profit Maximizes

The process or strategy of adjusting the production output and pricing to achieve the highest possible profit.