Craylon Corporation Has Net Income After Tax of $4

Multiple Choice

Craylon Corporation has net income after tax of $4.5 million, cash of $0.5 million, current liabilities of $3.4 million, debt of $6.8 million, retained earnings of $1.5 million, book value for its 5 million common shares of $30 million and a current price/earnings multiple of 18. It is considering the purchase of Dahlia Ltd. whose shares trade at $32.00 and at price/earnings multiple of 24. Craylon plans to offer two of its own shares for one of Dahlia's. What is the disadvantage to this offer?

A) It has higher risk to Craylon and may result in an increase in its cost of capital.
B) It impacts negatively on the company's liquidity and puts short term commitments at risk.
C) It is less attractive to Dahlia as it is implicitly asking shareholders in the target company to bear the risk of the merger's success.
D) It will impact negatively on earnings, diluting long-term shareholder wealth.
E) It is that Dahlia's share price is not as high as the bid price and given the usual premium for mergers, Craylon is paying too much.