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 price-earnings ratio as a result of the acquisition?
A)0
B)3.0
C)-3.2
D)-3.6
E)-1.8

Question

Quizplus · Accepted Answer

The acquisition is a stock-for-stock transaction with no added value, so the combined company's earnings per share (EPS) will decrease due to the lower EPS of Left Company. This will lead to a decrease in Right's price-earnings ratio.

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