The Shareholders of Jolie Company Have Voted in Favor of a Buyout

question 73

Multiple Choice

The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt Corporation.Information about each firm is given here: Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie.Assume the NPV of the acquisition is zero.What will the post-merger PE ratio be for Pitt?

• A)8.4
• B)9.2
• C)9.8
• D)10.5
• E)11.2

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Definitions:

Moral Hazard

The situation in which an entity has the incentive to take undue risks because the cost of those risks will be borne, at least in part, by others.

Firm-Specific Risk

The risk associated with an individual company, which can be reduced through diversification in investment.

Market Risk

The possibility that investors might incur losses because of elements influencing the general performance of the financial markets.

Informationally Efficient

A market condition where all existing information is completely accounted for in stock prices, thereby eliminating the possibility of consistently securing above-average profits.