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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?
There 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 🙂 )
hhmm 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.
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