Consider Two Firms, Bob Company and Cat Enterprises, Both with Earnings

question 19

Multiple Choice

Consider two firms, Bob Company and Cat Enterprises, both with earnings of $10 per share and 5 million shares outstanding. Cat is a mature company with few growth opportunities and a stock price of $25 per share. Bob is a new firm with much higher growth opportunities and a stock price of $40 per share. Assume Bob acquires Cat using its own stock and the takeover adds no value. In a perfect capital market, how many shares must Bob offer Cat's shareholders in exchange for their shares?

• A) 1 share of new company after takeover for each share of Cat Enterprises.
• B) 0.625 shares of new company after takeover for each share of Cat Enterprises.
• C) 1.6 shares of new company after takeover for each share of Cat Enterprises.
• D) 0.3846 shares of new company after takeover for each share of Cat Enterprises.

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Definitions:

Forecasted Profit

An estimate or prediction of the financial gain or profit that a business expects to make in a future period.

Buying Decision

The process of making a choice among available alternatives that culminates in the purchase of a product or service.

Mental Step

A stage in cognitive processing or decision-making, often used to describe phases in the buying process of consumers.

Customer Benefit Plan

A strategic outline that identifies and communicates the advantages or value a customer will gain from a product or service.