When Firm A acquired Firm B, no incremental value was created but earnings per share increased. If the financial markets are astute, the price-earnings ratio of Firm A should ____ and the stock price of Firm A should _____.
A) decrease; decrease
B) decrease; increase
C) decrease; remain constant
D) increase; decrease
E) increase; increase

Question

Quizplus · Accepted Answer

If no incremental value is created by the acquisition, the market might view the earnings increase skeptically, leading to a decrease in the price-earnings ratio as earnings increase without a corresponding increase in stock price. However, the stock price might not change if the market had already anticipated the effects of the acquisition.

When Firm a Acquired Firm B, No Incremental Value Was