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Bluff Inc is considering making a takeover bid for Ulna Co, but the board of directors of Bluff does not want any dilution in the earnings per share as a result of the acquisition. The following information is available about the companies.
It has been agreed that Ulna's shares will be purchased on a P/E ratio of 15, and that the purchase consideration would be entirely in new shares of Bluff. The directors of Bluff are expecting that there will be some cost savings and efficiency improvements as a result of the takeover, and these will add to the combined earnings of the group. Corporation tax is 25%. What is the minimum amount of cost savings that would be required to avoid a dilution in the earnings per share of Bluff as a result of the acquisition of Ulna? The minimum amount by which combined annual profits must increase is $________. |