Question

Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share for the Knight Corporation will be $8 with or without the merger. However, the standard deviation of the earnings will go from $1.92 to $1.36 with the merger because the two firms are negatively correlated.

**a.** Compute the coefficient of variation for the
Knight Corporation before and after the merger. **(Do not
round intermediate calculations and round your answers to 2 decimal
places.)**

** **

**b.** Comment on the possible impact on Knight’s
postmerger P/E ratio, assuming investors are risk-averse.

Answer #1

**I have answered the question below**

**Please up vote for the same and thanks!!!**

**Do reach out in the comments for any
queries**

**Answer:**

a.

Coefficient of variation = Standard deviation / mean

the mean earning in our case = expected earning = 8

Standard deviation Pre-merger = 1.92

Standard deviation Post-merger = 1.36

Coefficient of variation Pre-merger = 1.92 / 2 = .96

Coefficient of variation Post-merger = 1.36/2 = .68

b.

A reduced coefficient of variation represents reduced risk, it means there will be lesser variance in earnings now and that makes the stock less risk.

Risk averse investors are being offered **lesser**
risk and may assign a **higher** P/E ratio to
post-merger earnings.

Because investors are taking less risk for same earning levels they will be willing to pay more for the shares.

Your company has earnings per share of
$5.
It has
1
million shares outstanding, each of which has a price of
$39.
You are thinking of buying TargetCo, which has earnings of
$2
per share,
1
million shares outstanding, and a price per share of
$21.
You will pay for TargetCo by issuing new shares. There are no
expected synergies from the transaction. Suppose you offered an
exchange ratio such that, at current pre-announcement share
prices for both firms, the...

Your company has earnings per share of $4. It has 1 million
shares outstanding, each of which has a price of $39. You are
thinking of buying TargetCo, which has earnings of $1 per share,1
million shares outstanding, and a price per share of $23. You will
pay for TargetCo by issuing new shares. There are no expected
synergies from the transaction. Suppose you offered an exchange
ratio such that, at current pre-announcement share prices for
both firms, the offer...

Your company has earnings per share of
$5.
It has
1
million shares outstanding, each of which has a price of
$44.
You are thinking of buying TargetCo, which has earnings of
$3
per share,
1
million shares outstanding, and a price per share of
$26.
You will pay for TargetCo by issuing new shares. There are no
expected synergies from the transaction. Suppose you offered an
exchange ratio such that, at current pre-announcement share
prices for both firms, the...

Your company has earnings per share of $5. It has 1 million
shares outstanding, each of which has a price of $39 . You are
thinking of buying TargetCo, which has earnings of $1 per share,
1 million shares outstanding, and a price per share of $23. You
will pay for TargetCo by issuing new shares. There are no expected
synergies from the transaction. Suppose you offered an exchange
ratio such that, at current pre-announcement share prices for
both firms,...

Your company has earnings per share of $ 4. It has 1 million
shares outstanding, each of which has a price of $ 38. You are
thinking of buying TargetCo, which has earnings of $ 3 per share,
1 million shares outstanding, and a price per share of $ 20. You
will pay for TargetCo by issuing new shares. There are no expected
synergies from the transaction. Suppose you offered an exchange
ratio such that, at current pre-announcement share prices...

Your company has earnings per share of $ 4. It has 1 million
shares outstanding, each of which has a price of $ 40. You are
thinking of buying TargetCo, which has earnings of $ 2 per share,
1 million shares outstanding, and a price per share of $ 25. You
will pay for TargetCo by issuing new shares. There are no expected
synergies from the transaction. Suppose you offered an exchange
ratio such that, at current pre-announcement share prices...

Your company has earnings per share of $ 3. It has 1 million
shares outstanding, each of which has a price of $ 42. You are
thinking of buying TargetCo, which has earnings of $ 1 per share,
1 million shares outstanding, and a price per share of $ 30. You
will pay for TargetCo by issuing new shares. There are no expected
synergies from the transaction. Suppose you offered an exchange
ratio such that, at current pre-announcement share prices...

Your company has earnings per share of $ 3. It has 1 million
shares outstanding, each of which has a price of $ 38. You are
thinking of buying TargetCo, which has earnings of $ 3 per share,
1 million shares outstanding, and a price per share of $ 26. You
will pay for TargetCo by issuing new shares. There are no expected
synergies from the transaction. Suppose you offered an exchange
ratio such that, at current pre-announcement share prices...

Your company has earnings per share of $ 5 . It has 1 million
shares? outstanding, each of which has a price of $ 35 . You are
thinking of buying? TargetCo, which has earnings per share of $ 1
?, 1 million shares? outstanding, and a price per share of $ 24 .
You will pay for TargetCo by issuing new shares. There are no
expected synergies from the transaction. Suppose you offer an
exchange ratio such? that, at...

Your company has earnings per share of $ 4. It has 1 million
shares outstanding, each of which has a price of $43. You are
thinking of buying TargetCo, which has earnings per share of $1,
1 million shares outstanding, and a price per share of $28. You
will pay for TargetCo by issuing new shares. There are no expected
synergies from the transaction. Suppose you offer an exchange ratio
such that, at current pre-announcement share prices for both
firms,...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 7 minutes ago

asked 10 minutes ago

asked 20 minutes ago

asked 23 minutes ago

asked 30 minutes ago

asked 32 minutes ago

asked 34 minutes ago

asked 42 minutes ago

asked 45 minutes ago

asked 47 minutes ago

asked 47 minutes ago

asked 47 minutes ago