Question

Asked Nov 14, 2019

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Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction.

If Rearden pays no premium to buy Associated Steel, then Rearden's price/earnings ratio after the merger will be closest to:

Answer choices

A) 12

B) 10.42

C) 7.80

D) 10

Step 1

With the given information, we can determine the price to earnings ratio after the merger using the following steps:

Step 2

Step 3

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