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OM Ltd is planning to merge with NI Ltd. Under the merger one share in...

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Accounting

OM Ltd is planning to merge with NI Ltd. Under the merger one share in OM Ltd will be exchanged for every 2.5 shares in NI Ltd. The new firm will be called OMNI Ltd.

As a result of the merger a reduction in costs in the amount of $100,000 is projected along with synergistic benefits amounting to $200,000 resulting from the increased distribution network and market share.

As a result of these improvements the P/E of the new firm is projected to be 14X.

Required: Calculate the expected market value of the merged firm and advise OM Ltd. whether they should go ahead with the merger, giving the reason for your recommendation.

OM Ltd

NI Ltd

Number of shares outstanding

300,000

125,000

Total Earnings

$1,500,000

$833,750

P/E Ratio

12X

9X

Market Price per share

$60

$60

EPS

$5

$6.67

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