The short-run increase in earnings per share which occurs in a share for share exchange when a company trading on a higher price to earnings ratio acquires a company trading on a lower price to earnings ratio.
|Sales||$400 million||$105 million|
|Net income||$80 million||$22 million|
|Cash flow||$140 million||$42 million|
|Book value||$320 million||$72 million|
|Number of common shares outstanding||50 million||20 million|
|Current market price of common stock||$30.50||$20.00|
|Recent market price range||$34-26||$22-18|
If Acquirer issues common stock at the current market price and uses the proceeds to acquire Target's outstanding common stock, the bootstrap earnings effect on post merger earnings would most likely occur if Target's acquisition price:
A. is $20 or lower.
B. is $20 or higher.
C. is $20 or lower and Acquirer's post merger P/E remains at the current level.
The bootstrap effect only occur when
- Acquirer's P/E ratio is higher than Target's and
- Acquirer's P/E post merger does not decline.