The correct answer is: $62,500,000.

The EPS of Scan Inc = $20 million/80 million = $0.25.

The current share price of Scan = $0.25 x 10 = $2.50.

The EPS of Hound Co = $6.25 million/10 million = $0.625.

The offer price for Hound shares is 12 x $0.625 = $7.50 per share or $75 million in total.

If the full price is paid in shares of Scan, the number of new shares issued would be $75 million/$2.50 = 30 million, making 110 million shares in issue.

The required annual earnings to avoid a dilution in EPS would be 110 million x $0.25 = $27.5 million.

Combined earnings of Scan and Hound = $20 million + $6.25 million = $26.25 million.

Increase in combined earnings needed to avoid dilution = $27.5 million - $26.25 million = $1.25 million.

For every $1,000 of purchase consideration paid in cash, the interest cost would be (8%) $80, but the reduction in the number of new Scan shares required would be $1,000/$2.50 = 400. This would reduce the required earnings by 400 x $0.25 = $100. This means that for every $1,000 of the purchase consideration paid in cash, the total required earnings will be $100 - $80 = $20 less.

To reduce the total required earnings by $1,250,000, the cash consideration must be ($1,250,000/$20) x $1,000 = $62,500,000. This leaves just $12,500,000 to be paid in shares, so that 5 million new shares would be issued.

Check:

Combined profit before interest after the takeover = $26,250,000.

Interest = $62,500,000 x 8% = $5,000,000.

Increase in earnings = $26,250,000 - $5,000,000 = $21,250,000.

Number of shares = 80 million + 5 million = 85 million

EPS = $21,250,000/85 million = $0.25. There would be no dilution in EPS.