Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share for the Knight Corporation will be $3 with or without the merger. However, the standard deviation of the earnings will go from $2.55 to $1.95 with the merger because the two firms are negatively correlated. a. Compute the coefficient of variation for the Knight Corporation before and after the merger. (Do not round intermediate calculations and round your answers to 2 decimal places.) Pre-merger Post-merger Coefficient of Variation b. Comment on the possible impact on Knight's postmerger P/E ratio, assuming investors are risk-averse. Risk-averse investors are being offered risk and may assign a P/E ratio to postmerger earnings.
Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share for the Knight Corporation will be $3 with or without the merger. However, the standard deviation of the earnings will go from $2.55 to $1.95 with the merger because the two firms are negatively correlated. a. Compute the coefficient of variation for the Knight Corporation before and after the merger. (Do not round intermediate calculations and round your answers to 2 decimal places.) Pre-merger Post-merger Coefficient of Variation b. Comment on the possible impact on Knight's postmerger P/E ratio, assuming investors are risk-averse. Risk-averse investors are being offered risk and may assign a P/E ratio to postmerger earnings.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share for the Knight Corporation
will be $3 with or without the merger. However, the standard deviation of the earnings will go from $2.55 to $1.95 with the merger
because the two firms are negatively correlated.
a. Compute the coefficient of variation for the Knight Corporation before and after the merger. (Do not round intermediate
calculations and round your answers to 2 decimal places.)
Pre-merger
Post-merger
Coefficient of
Variation
b. Comment on the possible impact on Knight's postmerger P/E ratio, assuming investors are risk-averse.
Risk-averse investors are being offered
risk and may assign a
P/E ratio to postmerger earnings.
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