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.What is the change in Little's price-earnings ratio as a result of the acquisition?
A)0
B)9.36
C)-4.70
D)-1.33
E)1.25

Question

Quizplus · Accepted Answer

The change in Little's price-earnings ratio is -1.33. After the acquisition, the combined company's earnings per share will be lower due to the higher price paid for Big's shares relative to its earnings, reducing the overall P/E ratio.

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