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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

From the base price level of 100 in 1979, Saudi Arabian and U.S. price levels in 2008 stood at 200 and 410, respectively. If the 1979 \(/riyal exchange rate was \)0.26/riyal, what should the exchange rate be in 2008? Suggestion: using purchasing power parity, adjust the exchange rate to compensate for inflation. That is, determine the relative rate of inflation between the United States and Saudi Arabia and multiply this times $/riyal of 0.26.

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Explain the functions of the following agencies:

Overseas Private Investment Corporation (OPIC)

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The Wall Street Journal reported the following spot and forward rates for the Swiss franc (\(/SF):

Spot .................................................... \)0.8202

30-day forward ................................... \(0.8244

90-day forward ................................... \)0.8295

180-day forward ................................. \(0.8343

a. Was the Swiss franc selling at a discount or premium in the forward market?

b. What was the 30-day forward premium (or discount)?

c. What was the 90-day forward premium (or discount)?

d. Suppose you executed a 90-day forward contract to exchange 100,000 Swiss francs into U.S. dollars. How many dollars would you get 90 days hence?

e. Assume a Swiss bank entered into a 180-day forward contract with Bankers Trust to buy \)100,000. How many francs will the Swiss bank deliver in six months to get the U.S. dollars?
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