The following facts apply to two companies, A and B, whose operations are completely independent.

Assume that A acquires B in exchange for 500,000 shares of common stock.

a. What will be the new earnings per share (EPS) for A?

b. What would you expect the new P/E ofA (after acquisition) to be? Assume a rational market.

c. What will be the total market value of A’s common stock after the acquisition? Assume a rational market.

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P/E Earnings per share Shares outstanding A 20 $1 10,000,000 B 5 $2 1,000,000