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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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