Company thinks that shareholders always look for the earning per share. Therefore, he considers maximization of the earnings per share as his company’s objective. His company’s current net profits are Kshs 80 and EPS is Kshs. 4. The current market price is Kshs 42. He wants to buy another firm which has current income of Kshs. 15.75, EPS of Kshs 10.50 and the market price per share of kshs 85.
Required:
(i) Calculate the maximum exchange ratio which the manager would offer so that he could keep EPS at the current level. [5 marks]
(ii) If the manager borrows funds at 15 percent rate of interest and buys out another company by paying cash, how much should he offer to maintain his EPS? Assume a tax rate of 52 percent. [5 marks]
b. Discuss five motives behind mergers. [10 marks]
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