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?
Answer: B
After merger: EPS = [(2000)(10) + (1000)(10)]/2500 = 12;
Price = [(2000)(10) + (1000)(50)]/2500 = 100; P/E ratio = 8.3