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.

---

Definitions:

Molecules

The smallest units of a chemical substance that retain their unique chemical identity.

Higher Boiling

Referring to a substance with a higher boiling point compared to another substance, often used to differentiate between similar compounds in purification processes.

Ketone

An organic compound characterized by a carbonyl group (C=O) bonded to two carbon atoms.

Acetone

A colorless, volatile, and flammable liquid used as a solvent, known chemically as propan-2-one or dimethyl ketone.