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

question 48

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.What is the change in Bob's price-earnings ratio as a result of the acquisition?

• A)0
• B)-2
• C)4
• D)-0.75
• E)1.25