Company A: EBT $300M, 50M shares at $10, tax rate 50%. Company B: NI $25M. A buys B for 100% stock at a $200M transaction value. What pretax cost synergies are needed to break even?

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IBPrep · Accepted Answer

A's NI = $300 x (1 - 50%) = $150M, so A's EPS = $150 / 50 = $3.00. New shares issued = $200 / $10 = 20M, for 70M pro forma shares. PF NI (no synergies) = $150 + $25 = $175M, PF EPS = $175 / 70 = $2.50. Dilution = $0.50/share. After-tax synergies needed = $0.50 x 70M = $35M. Pretax synergies = $35 / (1 - 50%) = $70M.

Company A: EBT $300M, 50M shares at $10, tax rate 50%. Company B: NI $25M. A buys B for 100% stock at a $200M transaction value. What pretax cost synergies are needed to break even?

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