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Chapter 5: Q.7 (page 648)

The postmerger P/E ratio can move in a direction opposite to that of the immediate postmerger earnings per share. Explain why this could happen

Short Answer

Expert verified

The opposite effect may result if there is dilution in the earnings per share, immediate postmerger, and many other factors.

Step by step solution

01

Explanation of P/E Ratio

P/E ratio is a financial ratio related to the company's performance, which measures the relationship between the share price and earning per share.

02

Effect on postmerger P/E ratio

If earning per share increases after the merger immediately, the purchasing company may have purchased the company with a slower growth rate and lower P/E ratio. If the earning per share gets reduced after postmerger, then there is a possibility of moving the P/E ratio in the opposite direction.

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Most popular questions from this chapter

What is a typical merger premium paid in a merger or acquisition? What effect does this premium have on the market value of the merger candidate, and when are most of this movement likely to take place?

You are the vice president of finance for exploratory resources, headquartered in Houston, Texas. In January 20X1, your firm鈥檚 Canadian subsidiary obtained a six-month loan of 150,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot exchange rate was U.S. \(0.8995/ Canadian dollars and the Canadian currency was selling at a discount in the forward market. The June 20X1 contract (face value = C\)150,000 per contract) was quoted at U.S. $0.8930/ Canadian dollar.

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b. If the bank does hedge with the forward contract, what is the maximum amount it can lose?

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