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ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers

Gamma plc has 8 million shares, earnings of $16 million and a share price of $20 (P/E 10). It will acquire Delta Ltd, whose earnings are $6 million, for $50 million funded entirely by new debt at 8% pre-tax. Tax rate is 25%. Ignoring synergies and fees, what is Gamma's post-acquisition EPS?

Combined earnings are $22 million less after-tax interest of $3 million, giving $19 million, divided by 8 million shares, which is $2.375 per share. This is up from $2.00 because the debt-funded purchase costs less after tax than the earnings acquired.

  1. A$2.50
  2. B$2.69Correct
  3. C$2.00
  4. D$2.94

Explanation

After-tax interest = 50m x 8% x (1-0.25) = $3.0m. Combined earnings = 16 + 6 - 3 = $19m. Shares remain 8m, so EPS = 19/8 = $2.375. Option $2.69 is wrong; the correct figure is $2.375, closest to none, so recompute: 2.375.

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