Consider Two Firms, Bob Company and Cat Enterprises, Both with Earnings

question 19

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

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Definitions:

Chromatid Pairing

The alignment of two sister chromatids during cell division, allowing for accurate DNA replication and segregation.

Telophase

The last stage of mitosis and of meiosis I and II when, having reached the poles, chromosomes become decondensed, and a nuclear envelope forms around each group.

Mitosis

The division of the cell nucleus resulting in two daughter nuclei, each with the same number of chromosomes as the parent nucleus; mitosis consists of prophase, prometaphase, metaphase, anaphase, and telophase. Cytokinesis usually overlaps the telophase stage.

Homologous Chromosomes

Pairs of chromosomes in a diploid organism that have the same gene sequence, inherited from each parent, and pair up during meiosis.