The following data on a merger are given: $\begin{array} { l c l l }
& \text { Firm A } & \text { Firm B}&\text { Firm AB } \
\text { Price per share } & \$ 100 & \$ 10 & \
\text { Total earnings } & \$ 500 & \$ 300 & \
\text { Shares outstanding } & 100 & 40 & \
\text { Total value } & \$ 10,000 & \$ 400 & \$ 11,000
\end{array}$ Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.Calculate the postmerger P/E ratio, assuming that cash is used in the acquisition and the merger has no immediate effect on total firm income.
A)12.75
B)6.25
C)13.75
D)17.85

Question

The following data on a merger are given: $\begin{array} { l c l l } 
& \text { Firm A } & \text { Firm B}&\text {  Firm AB } \
\text { Price per share } & \$ 100 & \$ 10 & \
\text { Total earnings } & \$ 500 & \$ 300 & \
\text { Shares outstanding } & 100 & 40 & \
\text { Total value } & \$ 10,000 & \$ 400 & \$ 11,000
\end{array}$ Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.Calculate the postmerger P/E ratio, assuming that cash is used in the acquisition and the merger has no immediate effect on total firm income.
A)12.75
B)6.25
C)13.75
D)17.85

Quizplus · Accepted Answer

The postmerger P/E ratio is calculated as the postmerger market value of equity divided by the postmerger earnings. The postmerger market value of equity is the sum of the premerger market values of equity for the two firms, which is $10,000 + $400 = $10,400. The postmerger earnings are the sum of the premerger earnings for the two firms, which is $500 + $300 = $800. Therefore, the postmerger P/E ratio is $10,400 / $800 = 13.

The Following Data on a Merger Are Given Firm a Has Proposed to Acquire Firm B at a l