Consider two firms,Left Company and Right Enterprises,both with earnings of $2.50 per share and 15 million shares outstanding.Left is a mature company with few growth opportunities and a stock price of $7 per share.Right is a new firm with much higher growth opportunities and a stock price of $16 per share.Assume Right acquires Left using its own stock and the takeover adds no value.What is the change in Right's earnings per share as a result of the acquisition?
A)$0.98
B)$3.21
C)-$0.76
D)$0
E)$2.50

Question

Quizplus · Accepted Answer

The correct answer is A. The change in Right's earnings per share as a result of the acquisition is $0.98. This is calculated as follows:EPS before acquisition = $2.50EPS after acquisition = $2.50 * (15 million shares / 30 million shares) = $1.25Change in EPS = $1.25 - $2.50 = -$0.98

Consider Two Firms,Left Company and Right Enterprises,both with Earnings of $2.50