If the P/E Paid for a Target Company Is Greater

question 178

Multiple Choice

If the P/E paid for a target company is greater than the P/E of the acquiring company, the effect on the earnings per share of the acquiring company will be ________.

• A) positive
• B) neutral
• C) negative
• D) uncorrelated

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Definitions:

Interest Rate

The cost of borrowing money or the return on investment, expressed as a percentage, charged by lenders to borrowers for the use of their money.

Substitution Effect

The change in demand for a good or service caused by a change in its price, making consumers replace it with a cheaper alternative.

Income Effect

A change in consumption patterns resulting from a change in real income due to variations in prices, other factors remaining constant.

Savings Rate

The proportion of disposable income that is saved by individuals or entities, rather than spent, often expressed as a percentage.