The McPherson Company is considering acquiring the McAlester Company. Selected financial data for the two companies are shown here:
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McPherson
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McAlester
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Sales (millions)
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$250
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$30
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Earnings after taxes (millions)
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$ 20
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$ 2.25
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Common shares outstanding (millions)
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5
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1
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Earnings per share
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$ 4.00
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$ 2.25
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Dividends per share
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$ 1.20
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$ 0.40
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Common stock (price per share)
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$ 40
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$18
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Both companies have 40 percent marginal tax rates. Assume that no synergistic benefits are expected.
a. Calculate the McPherson Company's postmerger earnings per share if the McAlester stockholders accept an offer of $20 a share in a stock-for-stock exchange. (The expression stock-for-stock exchange means that the common stock of one company is exchanged for the common stock of another company.)
b. Recalculate part a, assuming that the McPherson common stock price is $42 a share. (All other figures remain constant.)
c. Calculate McPherson's earnings per share if the McAlester stockholders accept one $6 convertible preferred share (stated value, $100) for each 5 shares of McAlester stock held.
d. Calculate McPherson's earnings per share if each group of 50 shares of McAlester stock is exchanged for one 8 percent, $1,000 debenture.
e. Compare the premerger expected dividend return on the McAlester stock with the expected postmerger dividends or interest available with the exchanges described in parts a, c, and d. (Undoubtedly, at the time of acquisition, McPherson would have pointed out these expected increases in yield to the McAlester stockholders.) Assume that an investor initially holds 100 shares of McAlester stock.
f. What can be said about comparing the expected total postmerger return (dividends plus price appreciation) on the McAlester stock versus the expected total postmerger return on the McPherson securities?