Question

Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share...

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.

Homework Answers

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.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
General Meters is considering two mergers. The first is with Firm A in its own volatile...
General Meters is considering two mergers. The first is with Firm A in its own volatile industry, the auto speedometer industry, while the second is a merger with Firm B in an industry that moves in the opposite direction (and will tend to level out performance due to negative correlation). General Meters Merger with Firm A General Meters Merger with Firm B Possible Earnings ($ in millions) Probability Possible Earnings ($ in millions) Probability $ 10 .20 $ 10 .15...
Problem 20-12 Portfolio consideration and risk aversion [LO20-4] General Meters is considering two mergers. The first...
Problem 20-12 Portfolio consideration and risk aversion [LO20-4] General Meters is considering two mergers. The first is with Firm A in its own volatile industry, the auto speedometer industry, while the second is a merger with Firm B in an industry that moves in the opposite direction (and will tend to level out performance due to negative correlation). General Meters Merger with Firm A General Meters Merger with Firm B Possible Earnings ($ in millions) Probability Possible Earnings ($ in...
Your company has earnings per share of $5. It has 1 million shares​ outstanding, each of...
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...
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...
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...
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...
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...
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...
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...
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...