Consider two firms, Bob Company and Cat Enterprises, both with earnings of $10 per share and 5 million shares outstanding. Cat is a mature company with few growth opportunities and a stock price of $25 per share
Bob is a new firm with much higher growth opportunities and a stock price of $40 per share. Assume Bob acquires Cat using its own stock and the takeover adds no value. In a perfect capital market, how many shares must Bob offer Cat's shareholders in exchange for their shares?
A) 1 share of new company after takeover for each share of Cat Enterprises.
B) 0.625 shares of new company after takeover for each share of Cat Enterprises.
C) 1.6 shares of new company after takeover for each share of Cat Enterprises.
D) 0.3846 shares of new company after takeover for each share of Cat Enterprises.
Answer: B
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