The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt Corporation. Jolie has a price-earnings ratio of 6, earnings of $230,000, and 60,000 shares outstanding. Pitt has a price-earnings ratio of 12, earnings of $660,000, and 125,000 shares outstanding. Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie. Assume the NPV of the acquisition is zero. What will the post-merger PE ratio be for Pitt?
A) 10.76
B) 9.20
C) 9.84
D) 10.32
E) 11.21

Question

Quizplus · Accepted Answer

To find the post-merger PE ratio, first calculate the combined earnings and the total number of shares after the merger. Jolie's earnings are $230,000 and Pitt's are $660,000, so combined earnings are $890,000. Jolie's shareholders receive 1 Pitt share for every 3 Jolie shares, so they receive 20,000 Pitt shares (60,000/3). The total number of Pitt shares post-merger is 145,000 (125,000 + 20,000). The post-merger PE ratio is calculated as (Total Market Value / Total Earnings). Since NPV is zero, the market value remains unchanged, and the PE ratio is calculated as (12 * 660,000) / 890,000 = 10.32.

The Shareholders of Jolie Company Have Voted in Favor of a Buyout