Consider two firms,Bob Company and Cat Enterprises,both with earnings of $10 per share and 5 million shares outstanding.Cat is a mature company with few growth opportunities and a stock price of $25 per share.Bob is a new firm with much higher growth opportunities and a stock price of $40 per share.Assume Bob acquires Cat using its own stock and the takeover adds no value.In a perfect capital market,how many shares must Bob offer Cat's shareholders in exchange for their shares?
A)1 share of BobCat for each share of Cat Enterprises
B)0.625 shares of BobCat company for each share of Cat Enterprises
C)1.6 shares of BobCat company for each share of Cat Enterprises
D)0.3846 shares of BobCat company for each share of Cat Enterprises
E)1.25 shares of BobCat company for each share of Cat Enterprises

Question

Quizplus · Accepted Answer

Bob's stock price is $40, and Cat's is $25. To maintain value parity, Bob must offer 0.625 shares for each Cat share ($25/$40 = 0.625).

Consider Two Firms,Bob Company and Cat Enterprises,both with Earnings of $10