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 figures for both firms involved here.
- 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 must pay too large a premium to win over the target's shareholders.
- There will be no impact on EPS because combined earnings and the combined share count offset one another exactly and precisely.
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