Consider Two Firms,Bob Company and Cat Enterprises,both with Earnings of $10

question 29

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 BobCat for each share of Cat Enterprises.
• B)0.625 shares of BobCat company for each share of Cat Enterprises.
• C)1.6 shares of BobCat company for each share of Cat Enterprises.
• D)0.3846 shares of BobCat company for each share of Cat Enterprises.

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Definitions:

Mortgage Rate

The interest rate charged on a mortgage loan.

Number of Houses Sold

A real estate metric that refers to the total count of residential dwellings sold during a specific time period.

Correlation

A statistical measure that describes the extent to which two variables change together.

Causation

The relationship between two variables where a change in one directly results in a change in the other.