Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › P/E ratio changes vs P/E ratio remains constant after the acquisition

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- July 26, 2021 at 12:23 pm #629469
https://opentuition.com/topic/louieed/

1) So if the P/E was to change post acquisition, then we would use the combined company valuation technique?“1. You would apply the new PE to the new earnings.”

I found this answer from a previous post.

Sir, I have a doubt in regards to calculation of the P/E ratio.

In most of the questions related to Mergers and Acquisition, the examiner specifically says that the “PE ratio remains constant after the acquisition”.

So then we use the P/E ratio of Predator Company to calculate the total value of the combined company.Sir lets say if the P/E ratio changes after the acquisition, then to calculate the value of the combined entity we apply NEW P/E to the new earnings right?

But how do we calculate this NEW P/E ratio. Is it calculated as,

NEW P/E = (MPS of Predator Co + MPS of Target Co)/ New EPS based on new earningsor

Is there are any other methods to calculate this NEW P/E ratio?Thanking you in advance for your kind explanation!

July 26, 2021 at 12:46 pm #629477If the PE ratio does change, then the question will tell you how it changes 🙂

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