Consider two firms,Big Company and Little Enterprises,both with earnings of $6 per share and 2 million shares outstanding.Big is a mature company with few growth opportunities and a stock price of $56 per share.Little is a new firm with much higher growth opportunities and a stock price of $72 per share.Assume Little acquires Big using its own stock and the takeover adds no value.In a perfect capital market,how many shares must Little offer Big's shareholders in exchange for their shares?
A)1.556 shares of Little for each share of Big Enterprises
B)0.643 shares of Little for each share of Big Enterprises
C)1 share of Little for each share of Big Enterprises
D)1.286 shares of Little for each share of Big Enterprises
E)0.778 shares of Little for each share of Big Enterprises

Question

Quizplus · Accepted Answer

To maintain the same value, Little must offer shares such that the value of shares given equals the value of Big's shares. Big's total value is 2 million shares * $56 = $112 million. Little's share price is $72, so the number of shares to offer is $112 million / $72 per share = 1.555 million shares. For each of Big's 2 million shares, Little offers 1.555 million / 2 million = 0.778 shares.

Consider Two Firms,Big Company and Little Enterprises,both with Earnings of $6