1. At the beginning of the year Ham Inc.'s management is considering making an offer to buy Egg Corporation. Egg's projected operating income (EBIT) for the current year is $30 million, but Ham believes that if the two firms were merged, it could consolidate some operations, reduce Egg's expenses, and raise its EBIT to $40 million. Neither company uses any debt, and they both pay income taxes at a 40% rate. Ham has a better reputation among investors, who regard it as better managed and also less risky, so Ham's stock has a P/E ratio of 15 versus a P/E of 12 for Egg. Since Ham's management will be running the entire enterprise after a merger, investors will value the resulting corporation based on Ham's P/E. Based on expected market values, how much synergy should the merger create? Show all work. No further information is given.
a. $129.96
b. $136.80
c. $144.00
d. $151.20
e. $158.76
2. Alberto Trucking is expected to pay an annual dividend of $2.90 per share next year. The stock is currently selling for $35.50 a share. What is the expected total return on this stock if that return is equally divided between a dividend yield and a capital gains yield?
4.09 percent
8.17 percent
16.34 percent
12.26 percent