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:

Cranial Nerve VIII

Also known as the vestibulocochlear nerve, it is responsible for hearing and balance.

Perilymph

The fluid that fills the space between the membranous labyrinth and the bony labyrinth of the inner ear.

Static Equilibrium

A state where an object is at rest, and all the forces acting upon it are balanced.

Maculae

Maculae are small, specialized regions in the sensory epithelia, notably in the vestibular system of the ear and the retina, involved in detecting balance and visual changes respectively.