Use the Following Information to Answer the Question(s) Below

question 28

Multiple Choice

Use the following information to answer the question(s) below.
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.
-If 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, then the price per share of the Associated Steel immediately after the announcement will be closest to:

• A) $15.00
• B) $17.20
• C) $18.60
• D) $19.10

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Definitions:

Natural Tolerances

The inherent variability found within a natural process or system's parameters.

Normal Distribution

It is characterized by a symmetric shape around the mean, where data samples are more densely populated close to the mean and less so the farther they are from it.

Inside Diameter

The measure of the distance across the innermost part of a hollow object or space.

Lower Control Limit

A threshold value in statistical process control below which a process is considered to be out of control on the lower side.