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Question 2:

Consider two firms, Bob Company and Cat Enterprises, both with earnings of $10 per share and 5 million shares outstanding. Cat is a mature company with few growth opportunities and a stock price of $25 per share. Bob is a new firm with much higher growth opportunities and a stock price of $40 per share. Assume Bob acquires Cat using its own stock and the takeover adds no value. In a perfect capital market, how many shares must Bob offer Cat's shareholders in exchange for their shares?

A) 1 share of new company after takeover for each share of Cat Enterprises.

B) 0.625 shares of new company after takeover for each share of Cat Enterprises.

C) 1.6 shares of new company after takeover for each share of Cat Enterprises.

D) 0.3846 shares of new company after takeover for each share of Cat Enterprises.

Note: Answer the question properly with clear steps and formulas written down properly.

Question 3:

Martin Manufacturing has earnings per share (EPS) of $3.00, 5 million shares outstanding, and a share price of $32. Martin is considering buying Luther Industries, which has earnings per share of $2.50, 2 million shares outstanding, and a share price of $20. Martin will pay for Luther by issuing new shares. There are no expected synergies from the transaction.If Martin pays no premium to acquire Luther, what will the earnings per share be after the merger?

Note: Answer the question properly with clear steps and formulas written down properly.

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