Companies a and B Are Valued as Follows

question 47

Multiple Choice

Companies A and B are valued as follows:

Company A now acquires B by offering one (new) share of A for every two shares of B (that is,after the merger,there are 2500 shares of A outstanding) .If investors are aware that there are no economic gains from the merger,what is the price-earnings ratio of A's stock after the merger?

• A)7.5
• B)8.3
• C)10.0

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Definitions:

Annual Investment

The amount of money invested in a particular asset or project on a yearly basis.

Time Value

The concept that money available in the present is worth more than the same amount in the future due to its earning capacity.

Payback Period

A way to determine the duration required for an investment to reach a point where returns equal the costs, providing a simple tool for evaluating project viability.

Net Cash Flow

The difference between a company’s cash inflows and outflows over a specific period, indicating its financial health.