Question

AcquirerCo purchases TargetCo by issuing $80,000,000 in debt at an 8% rate. TargetCo has $6,500,000 in EBIT and AcquirerCo can recognize $2,000,000 in synergies and has a 40% marginal tax rate. An analyst covering AcquirerCo estimates its standalone earnings per share at $2.75 per share on 25,000,000 shares. What are AcquirerCo's pro forma earnings per share after the transaction

Answer 1

AcquirerCo's pro forma earnings per share after the transaction is $2.8.

Earnings per share

Using this formula

Pro forma EPS = Pro forma Net Income / AcquirerCo shares outstanding. Pro forma Net Income = AcquirerCo Net Income + TargetCo after-tax EBIT + after-tax synergies - after-tax interest expense.

First step

AcquirerCo Net Income = $2.75  EPS estimate x 25,000,000 outstanding shares

AcquirerCo Net Income = $68,750,000

TargetCo after-tax EBIT = $6,500,000 x (1 - 40% tax rate)

TargetCo after-tax EBIT = $3,900,000

After-tax synergies = $2,000,000 x (1 - 40% tax rate)

After-tax synergies = $1,200,000

After-tax interest expense to finance deal = $80,000,000 x 8% cost of debt x (1 - 40% tax rate)
After-tax interest expense to finance deal = $3,840,000

Second step

Pro forma Net Income= $68,750,000 + $3,900,000 + $1,200,000 - $3,840,000

Pro forma Net Income = $70,010,000

Third step

Pro forma EPS = $70,010,000 Net Income / 25,000,000 shares

Pro forma EPS = $2.8

Therefore AcquirerCo's pro forma earnings per share after the transaction is $2.8.

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