1. EPS, PE, and MergersThe shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here:

1. EPS, PE, and MergersThe shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here:

Flannery Stultz

Price-earnings ratio 6.35 12.70

Shares outstanding 73,000.00 73,000.00

Earnings $230,000 $690,000

Flannery’s shareholders will receive one share of Stultz stock for every three shares they hold in Flannery.

a. What will the EPS of Stultz be after the merger? What will the PE ratio be if the NPV of the acquisition is zero?

b. What must Stultz feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover.

2 . Gordon Growth Model in the Case of No Current Dividend

Quest Financial Services does not currently pay a dividend but is expected to begin to do so in five years (at t = 5). The first dividend is expected to be $4.00 and to be received five years from today. That dividend is expected to grow at 6 percent into perpetuity. The required return is 10 percent. What is the estimated current intrinsic value?

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