Big Co. would like to buy Small Co. for a 25% premium. Currently Big Co.’s stock price is $33.24, its EPS is $2.98 and it has 75mm shares outstanding. Currently Small Co.’s stock price is $22.50 (before premium), its EPS is $2.35 and it has 19mm shares outstanding. Big Co.’s cost of debt is 5.5% and its tax rate is 35%.
4. If Big Co. uses stock to acquire Small Co. what would Big Co.’s proforma EPS be?
5. If Big Co. uses debt to acquire Small Co. what would Big Co.’s proforma EPS be?
6. What is the maximum price Big Co. can pay before the deal becomes dilutive if it acquires Small Co. with debt?