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Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original
Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own.
EPS and postmerger price - Data for Henry Company and Mayer services are given in the following table. Henry company is considering merging with Mayer by swaping 1.25 shares of its stock for each share of Mayer stock. Henry company expects its stock to sell at the same price/earning (P/E) multiple after the merger as before merging. Item=Earnings available for common stock /for Henry Company= $225,000/For Mayer services= $50,000 Item=Number of shares of common stock outstanding/For Henry Company= $90,000/ For Mayer services $15,000 Item=Market price per share/ For Henry Company= $45 / For Mayer services= $50 a. Calculate the ratio of exchange in market price. b. calculate the earnings per share (EPS) and price/earnings (P/E) ratio for each company. c. Calculate the price/earnings (P/E) ratio used to purchase Mayer Services. d. Calculate the postmerger earnings per share (EPS) for Henry Company. e. Calculate the expected market price per share of the merged firm. Discuss this result in light of your findings in part a. (a)Market price ratio of exchange: ($45 ( 1.25) ( $50 1.125
(b)Henry CompanyEPS$225,000 ( 90,000$2.50
P/E$45 ( $2.5018 times
Mayer ServicesEPS$50,000 ( 15,000$3.33
P/E$50 ( $3.3315 times
(c)Price paidRatio of exchange ( Market price of acquirer
Price paid1.25 ( $45$56.25
P/E$56.25 ( $3.3316.89 times
(d)New shares issued1.25 ( 15,00018,750
Total shares90,000 18,750108,750
EPS$275,000 ( 108,750$2.529
(e)New market priceNew EPS ( P/E
$2.529 ( 18 $45.52
The market price increases due to the higher P/E ratio of the acquiring firm and the fact that the P/E ratio is not expected to change as a result of the acquisition.
ANOTHER QUESTION Tax credits A U.S. - based MNC's has a foreign subsidiary that earns $250,000 before taxes, with all the after-tax funds to be available to the parent in the form of dividends. The applicable taxes consist of a 33% foreign income tax rate, a foreign dividend withholding tax rate of 9%, and a U.S. tax rate of 34%. Calculate the net funds available to the parent MNC if: a. foreign taxes can be applied as a credit against the MNC's U.S. tax liability. b. No tax credits are allowed.
MNCs receipt of dividends can be calculated as follows:
Subsidiary income before local taxes$250,000
Foreign income tax at 33%82,500
Dividend available to be declared$167,500
Foreign dividend withholding tax at 9%15,075
MNCs receipt of dividends$152,425
(a)If tax credits are allowed, then the so-called grossing up procedure will be applied:
Additional MNC income$250,000
U.S. tax liability at 34%$85,000
Total foreign taxes paid (credit)
($82,500 $15,075)(97,575)(97,575)
U.S. taxes due0
Net funds available to the MNC$152,425
(b)If no tax credits are permitted, then:
MNCs receipt of dividends$152,425
U.S. tax liability ($152,425 0.34)51,825
Net funds available to the MNC$100,600