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- This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
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- June 25, 2017 at 3:00 pm #394037
Hi Sir,
Please advise.
Paolo co acquires another company and pays a price that represent a higher P/E valuation than the current P/E of Paolo co.
The purchase consideration is paid by issuing new paolo co shares. There are no synergy arising from the takeover. Paolo co has some debt in its capital structure.
Which of the following are true.
1) There is a reduction of earnings of Paolo co.
Why is statement 1 true? What am I missing.. why would acquiring another company with a higher P/E ratio via issuing new shares cause earnings to fall?
June 25, 2017 at 3:10 pm #394041There is no reason on earth for the earrings of Paolo to fall.
However, are you sure you have copied the question correctly? If it says ‘a reduction in the earnings per share of Paolo’, then that would be true.
(I don’t know where you are finding these questions, but I trust you appreciate that there are no multiple choice questions in Paper P4 🙂 )
June 25, 2017 at 7:00 pm #394061hhmm no I copied the question as is! Its an old Kaplan book I am using. might be an error….
Some of the questions I post are examples in the book and I pull out bits I do not understand/ the theory and ask them as a questions.
thanks sir.
June 26, 2017 at 5:44 am #394082Do make sure you use a current edition of a Revision Kit to practice questions, to that you get used to the style of the actual exam questions.
If you had copied the question correctly then there is definitely an error – what I replied before is definitely correct 🙂
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