A firm with a P/E ratio of 15 wants to take over a firm that is 1/3 its size (in market capitalization)that has a P/E ratio of 20. What would be the P/E ratio of the merged firm?

Question

Quizplus · Accepted Answer

The P/E ratio of the merged firm would be 16.0. This is because the P/E ratio is a measure of the market value of a company's stock relative to its earnings. When two companies merge, the market value of the combined company is simply the sum of the market values of the two individual companies. However, the earnings of the combined company are not simply the sum of the earnings of the two individual companies. This is because when two companies merge, they often find ways to reduce their combined costs. This means that the combined company can earn more money than the two individual companies could have earned on their own. As a result, the P/E ratio of the merged company will be lower than the average of the P/E ratios of the two individual companies.

A Firm with a P/E Ratio of 15 Wants to Take