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Question 11.Qfr.3: Carsley plc and Powell plc are planning to merge to form Sti...

Carsley plc and Powell plc are planning to merge to form Stimac plc. It has been agreed that Powell’s shareholders will accept three shares in Carsley for every share in Powell they hold. Other details are as follows:

Carsley plc Powell plc
Number of shares 40m 10m
Annual earnings £10m £5.8m
Price/earnings ratio 8 10

Post-merger annual earnings of the enlarged company are expected to be 8 per cent higher than the sum of the earnings of each of the companies before the merger, due to economies of scale and other benefits. The market is expected to apply a P/E ratio of 9 to Stimac plc.
Determine the extent to which the shareholders of Powell will benefit from the proposed merger.

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