Companies a and B Are Valued as Follows Company a Now Acquires B by Offering One (New) Share

question 8

Multiple Choice

Companies A and B are valued as follows: $\begin{array} { l c c } & \mathrm { A } & \mathrm { B } \\\text { Number of shares } & 2,000 & 1,000 \\\text { Earnings per share } & \$ 10 & \$ 10 \\\text { Share price } & \$ 100 & \$ 50\end{array}$ 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 2,500 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
• D)5

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Definitions:

Price Floor

A government- or authority-imposed minimum price that can be charged for a commodity, to prevent prices from dropping too low.

Lettuce

A leafy green vegetable, commonly used in salads and other dishes, known for its crisp texture and mild flavor.

Equilibrium Price

The equilibrium price where goods supplied and goods demanded are in balance.

Price Floor

A government- or authority-imposed minimum price on goods or services, below which they cannot be sold, usually set to prevent market prices from falling too low.