In the given example with Buyer holding 10 shares at $25 and Net Income of $10, Seller Net Income of $10, and Purchase Equity Value of $150, what is the Combined EPS after the deal?

In the given example with Buyer holding 10 shares at $25 and Net Income of $10, Seller Net Income of $10, and Purchase Equity Value of $150, what is the Combined EPS after the deal?

• A. 1.00
• B. 1.50
• C. 2.00
• D. 1.25

Answer: (D)

This question tests how to compute pro forma EPS after an all-stock deal. After the merger, the combined net income equals the sum of both entities’ earnings: 10 + 10 = 20. If the purchase is financed with stock at the buyer’s current price of 25, the issuance adds new shares equal to 150 divided by 25, which is 6 shares. The buyer starts with 10 shares, so total shares outstanding after the deal are 16. The combined EPS is then 20 divided by 16, which equals 1.25. If the deal were cash-financed, there would be no new shares, and EPS would be 20/10 = 2.00, but with stock financing, the dilution to 1.25 is the correct result.

This question tests how to compute pro forma EPS after an all-stock deal. After the merger, the combined net income equals the sum of both entities’ earnings: 10 + 10 = 20. If the purchase is financed with stock at the buyer’s current price of 25, the issuance adds new shares equal to 150 divided by 25, which is 6 shares. The buyer starts with 10 shares, so total shares outstanding after the deal are 16. The combined EPS is then 20 divided by 16, which equals 1.25. If the deal were cash-financed, there would be no new shares, and EPS would be 20/10 = 2.00, but with stock financing, the dilution to 1.25 is the correct result.