Consider Two Firms,Left Company and Right Enterprises,both with Earnings of $2.50

question 11

Multiple Choice

Consider two firms,Left Company and Right Enterprises,both with earnings of $2.50 per share and 15 million shares outstanding.Left is a mature company with few growth opportunities and a stock price of $7 per share.Right is a new firm with much higher growth opportunities and a stock price of $16 per share.Assume Right acquires Left using its own stock and the takeover adds no value.In a perfect capital market,how many shares must Right offer Left's shareholders in exchange for their shares?

• A)2.2857 shares of Right for each share of Left Enterprises
• B)0.4375 shares of Right for each share of Left Enterprises
• C)1 share of Right for each share of Left Enterprises
• D)0.6957 shares of Right for each share of Left Enterprises
• E)0.7425 shares of Right for each share of Left Enterprises

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Definitions:

Demand Schedule

A table that shows the quantity of goods or services that consumers are willing and able to purchase at various price levels.

Perfectly Competitive

A market structure characterized by a large number of buyers and sellers, homogenous products, and no barriers to entry or exit.

Duopoly Market

A market structure dominated by only two producers or sellers, leading to a form of competition that significantly impacts pricing and output decisions.

Merging Firms

The process where two or more companies combine into a single company, often to expand market share, reduce costs, or increase competitiveness.