medium · Principles of Finance time-value-of-money
An acquirer with a P/E ratio of 25 is considering an all-stock acquisition of a target with a P/E ratio of 15.
Assuming no synergies and no deal-related accounting adjustments, what will be the immediate impact on the acquirer's Earnings Per Share (EPS)?
- The impact cannot be determined without knowing the absolute net income of both firms.
- The deal will be accretive because the acquirer's cost of equity 'currency' is cheaper than the target's earnings yield.
- The deal will be dilutive because the acquirer is paying a premium for the target.
- There will be no impact on EPS as the two companies' earnings are simply combined.
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