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

question 77

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
• E)1.25 shares of BobCat company for each share of Cat Enterprises

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