In the event that Active Corp., which has a low P/E ratio, acquires Basic Corp., which has a higher P/E ratio, we could be assured that one of the following would occur, with everything else being equal. Which one would occur?
A) Active Corp. will have an immediate increase in EPS.
B) Active Corp. will have an immediate decrease in EPS.
C) Active Corp. will have an immediate increase in the growth rate of EPS.
D) Active Corp. will have an immediate decrease in the P/E ratio.

Question

Quizplus · Accepted Answer

When a company with a low P/E ratio acquires another company with a higher P/E ratio, it generally means the acquiring company is paying a premium relative to its own earnings valuation. This typically results in an immediate dilution of the acquiring company's earnings per share (EPS), hence an immediate decrease in EPS for Active Corp.

In the Event That Active Corp