ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers
Echo plc (20 million shares at $5.00; EPS $0.50) buys Fenn Ltd for $40 million cash, funded entirely by new 8% debt. Tax is 25%. Fenn's post-tax earnings are $3.0 million and there are no synergies. What is Echo's pro forma EPS?
Pro forma EPS is $0.53. Combined earnings are $10.0m plus $3.0m less after-tax interest of $2.4m, giving $10.6m over 20 million shares. Ignoring the tax shield or the target's earnings would give different figures.
- A$0.510Correct
- B$0.540
- C$0.565
- D$0.475
Explanation
Echo earnings = 20m x $0.50 = $10.0m. Interest = $40m x 8% = $3.2m; after tax = $2.4m. Combined earnings = $10.0m + $3.0m - $2.4m = $10.6m. EPS = $10.6m/20m = $0.53. This does not match any option exactly, so check: option $0.510 would arise from $10.2m, which is wrong. Correct value is $0.530.
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