Assume the following financial data for the Noble Corporation and Barnes

Enterprises:

Noble

Corporation

Barnes

Enterprises

Total earnings ......................................................... \(1,820,000 \)5,620,000

Number of shares of stock outstanding ................. 650,000 2,810,000

Earnings per share ................................................. \(2.80 \)2.00

Price-earnings ratio (P/E) ....................................... 203 283

Market price per share............................................ \(56 \)56

a.If all the shares of the Noble Corporation are exchanged for those of Barnes

Enterprises on a share-for-share basis, what will postmerger earnings per share

be for Barnes Enterprises? Use an approach similar to that in Table 20-3.

b.Explain why the earnings per share of Barnes Enterprises changed.

c.Can we necessarily assume that Barnes Enterprises is better off after the

merger?

Step by step solution

01

Calculation of earnings per share

To calculate the earnings per share total earnings and total outstanding shares are calculated.

$\begin{array}{rcl}\mathbf{Total}\mathbf{}\mathbf{Earning}& \mathbf{=}& \mathbf{Noble}\mathbf{}\mathbf{Co}\mathbf{.}\mathbf{}\mathbf{Earning}\mathbf{+}\mathbf{Barnes}\mathbf{}\mathbf{Enterprises}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{820}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{620}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{440}\mathbf{,}\mathbf{000}\end{array}$

The number of shares outstanding:

$\begin{array}{rcl}\mathbf{Share}\mathbf{}\mathbf{Outstanding}& \mathbf{=}& \mathbf{Noble}\mathbf{}\mathbf{Co}\mathbf{.}\mathbf{}\mathbf{Shares}\mathbf{+}\mathbf{Barnes}\mathbf{}\mathbf{Enterprise}\\ & \mathbf{=}& \mathbf{2}\mathbf{,}\mathbf{810}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{650}\mathbf{,}\mathbf{000}\\ & \mathbf{=}& \mathbf{3}\mathbf{,}\mathbf{460}\mathbf{,}\mathbf{000}\end{array}$

Calculation of net earnings per share:

$\begin{array}{rcl}\mathbf{Earning}\mathbf{}\mathbf{Per}\mathbf{}\mathbf{Share}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{Earning}}{\mathbf{Total}\mathbf{}\mathbf{Outstanding}\mathbf{}\mathbf{Shares}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{440}\mathbf{,}\mathbf{000}}{\mathbf{3}\mathbf{,}\mathbf{460}\mathbf{,}\mathbf{000}}\\ & \mathbf{=}& \mathbf{}\mathbf{\$}\mathbf{2}\mathbf{.}\mathbf{15}\mathbf{}\mathbf{per}\mathbf{}\mathbf{share}\end{array}$

02

Effect on earnings per share

Due to the increase in the price to earnings ratio, earning per share of the company also increases. Whenever firm acquires another company with low price to earnings ratio than its own price to earnings ratio then earning per share after merger increases.

03

 Performance after the merger

No, company did not assume anything without any information that Barnes Enterprise is become better after the merger because whether company perform better of not after the merger is depend upon the various factors other than the capital budgeting techniques.

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