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Chapter 5: Q.6 (page 648)

If a firm wishes to achieve immediate appreciation in earnings per share as a result of a merger, how can this be best accomplished in terms of exchange variables? What is a possible drawback to this approach in terms of long-range considerations?

Short Answer

Expert verified

A firm with a lower P/E ratio should be acquired.

The growth rate of the surviving company may decline, and long-term growth may get reduced.

Step by step solution

01

Explanation on Merger

The process of combining two or more companies, and in which companies work under the name of the purchasing company, is known as a merger.

02

Result of Merger

If the business wants to increase the earning per share after the merger, then the company should purchase the company with a lower P/E ratio and a lower growth rate.

As the lower P/E ratio company is purchased, it may result in a reduction in the growth rate and long-term growth rate of the acquiring company.

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