Mergers and PIE Ratios. Castles in the Sand currently sells at a price-earnings multiple of 10. The firm has 2 million shares outstanding and sells at a price per share of $40. Finn Foundation has a PIE multiple of 8, has 1 million shares outstanding, and sells at II price per share of $20.a. If Castles acquire the other firm by exchanging one of its shares for every two of Finn Foundation"s, what will be the earnings per share of the merged firm?b. What should be the PIE of the new firm if the merger has no economic gains? What will happen to Castles" price per share"! Show that shareholders of neither Castles nor Firm Foundation realize any change in wealth.c. What will happen to Castles" price per share if the market docs not realize that the PIE ratio of the merged firm ought to differ from Castles" pre-merger ratio"d. How arc the gains from the merger split between shareholders of the two firms if the market is fooled as in part (e)?
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