Companies A and B are valued as follows: Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2500 shares of A outstanding). If investors are aware that there are no economic gains from the merger, what is the price-earnings ratio of A's stock after the merger?

The answer is 8.3

Explanation:

Solution

Given:

Company A Company B

Shares outstanding 2,000 1,000

The Earning per share 10 10

Price per share 100 50

Now,

The EPS after merger = (2000 * 10 + 1000 * 10) / 2500 = 12

The price after merger = (2000 * 100 + 1000 * 50) / 2500 = 100

The price-earnings ratio = 100/12 = 8.3

Therefore the price earnings ratio of A's stock after the merger is 8.3

8.3.

Explanation:

From the question, we are given that the Shares outstanding for company A = 2,000, Shares outstanding for company B = 1,000, Earing per share of company A = 10, Earing per share of Company B = 10, Price per share of company A = 100, price per share of Company B = 50.

Therefore, the Earing per share of Company A and Company B after merging = (2000 * 10 + 1000 * 10) / 2500.

Earing per share of Company A and Company B after merging = 12.

Also, the price after company A and Company B merged = (2000 * 100 + 1000 * 50) / 2500.

The price after company A and Company B merged = 100.

Thus, the price-earnings ratio = price after company A and Company B merged / Earing per share of Company A and Company B after merging.

price-earnings ratio = 100/12.

= 8.3