Rawlings Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rawlings Metal is thinking of buying Pipes ‘n Hoses, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rawlings Metal will pay for Pipes ‘n Hoses by issuing new shares. There are no expected synergies from the transaction. Rawlings offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Pipes ‘n Hoses. What is the price per share of Rawlings immediately after the announcement, to the closest dollar?[Fill in the blank]单项选择题
A
a. $19
B
b. $18
C
c. $20
D
d. $24

Question

Rawlings Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rawlings Metal is thinking of buying Pipes ‘n Hoses, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rawlings Metal will pay for Pipes ‘n Hoses by issuing new shares. There are no expected synergies from the transaction. Rawlings offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Pipes ‘n Hoses. What is the price per share of Rawlings immediately after the announcement, to the closest dollar?[Fill in the blank]单项选择题

A

a. $19

B

b. $18

C

c. $20

D

d. $24

BlackTom AI · Accepted Answer

For a stock‑for‑stock acquisition with no synergies, the combined firm’s total equity value immediately after the announcement equals the sum of the two firms’ pre‑announcement market values (the 20% premium is a transfer to target shareholders, not new value created).

Step 1 — compute pre‑deal market values:
- Rawlings market cap = $20 × 10 million = $200 million.
- Pipes ‘n Hoses market cap = $15 × 4 million = $60 million.
- Sum (combined pre‑deal value) = $200m + $60m = $260 million.

Step 2 — determine the exchange ratio implied by a 20% premium:
- Offer price per Pipes share = $15 × 1.20 = $18.
- Exchange ratio = $18 / $20 (Rawlings’ pre‑announcement price) = 0.9 Rawlings shares per Pipes share.
- New Rawlings shares issued = 0.9 × 4 million = 3.6 million.

Step 3 — compute total shares outstanding after the deal:
- New total shares = 10 million + 3.6 million = 13.6 million.

Step 4 — compute post‑announcement Rawlings share price:
- Since no synergies, combined equity value = $260 million.
- Post‑deal price per share = $260 million / 13.6 million = $19.117647...
- Rounded to the closest dollar = $19.

Why the 20% premium does not raise total value to $272m: the premium paid ($18 × 4m = $72m) is funded by issuing new acquirer shares; target shareholders gain that premium, but it is a redistribution of existing equity value from pre‑deal Rawlings shareholders — so total combined equity value remains the sum of the pre‑deal market caps ($260m), not $272m.

Why other choices are incorrect:
- $20 (choice c) assumes the premium creates new value equal to the premium (incorrect for no‑synergy, stock‑financed deals).
- $18 (choice b) and $24 (choice d) are inconsistent with the correct combined value and resulting dilution calculation.

Conclusion: The post‑announcement price per Rawlings share, rounded to the nearest dollar, is $19 (choice a), which matches the provided answer.

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