Companies A and B are valued as follows: Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2500 shares of A outstanding). If investors are aware that there are no economic gains from the merger, what is the price-earnings ratio of A's stock after the merger?

The answer is 8.3

Explanation:

Solution

Given:

                                         Company A         Company B

Shares outstanding            2,000                      1,000

The Earning per share           10                            10

Price per share                      100                          50

Now,

The EPS after merger = (2000 *10 + 1000 *10)/2500 = 12

The price after merger = (2000 *100 + 1000 * 50)/2500 = 100

The price-earnings ratio = 100/12 = 8.3

Therefore the price earnings ratio of A's stock after the merger is 8.3

hopefull this will you!

the business rule that governs the relationship is one-to-many as there are multiple customers for each agent.