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At the Beginning of the Year Giant Inc

question 15

Multiple Choice

At the beginning of the year Giant Inc.'s management is considering making an offer to buy Micro Corporation.Micro's projected operating income (EBIT) for the current year is $30 million,but Giant believes that if the two firms were merged,it could consolidate some operations,reduce Micro's expenses,and raise its EBIT to $35 million.Neither company uses any debt,and they both pay income taxes at a 35% rate.Giant has a better reputation among investors,who regard it as very well managed and not very risky,so its stock has a P/E ratio of 12 versus a P/E of 9 for Micro.Since Giant's management would be running the entire enterprise after a merger,investors would value the resulting corporation based on Giant's P/E.If Micro has 10 million shares outstanding,by how much should the merger increase its share price,assuming all of the synergy will go to its stockholders?

Definitions:

Original Method

The initial or primary implementation of a method before it is overridden or modified by additional functionality.

General Case

A situation or condition that applies broadly, without special considerations or exceptions.

Recursive Algorithm

A method of solving a problem where the solution involves solving smaller instances of the same problem.

Base Case

A condition within a recursive function that does not call itself, thereby stopping the recursion.