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Q.7

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Foundations Of Financial Management
Found in: Page 648
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

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

The opposite effect may result if there is dilution in the earnings per share, immediate postmerger, and many other factors.

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Step by Step Solution

Step 1: 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.

Step 2: 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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