CFA Practice Question

There are 86 practice questions for this study session.

CFA Practice Question

Assume firm A is considering to acquire firm B. Financial information for the two firms both prior to and after the merger are shown below.

If the two firms are combined, will there be a bootstrap effect?
Correct Answer: No

A must issue 1,000,000/25 = 40,000 shares. The total shares outstanding for the combined entity will be 140,000 (100,000 + 40,000). The new EPS will be (150,000 + 50,000) / 140,000 = 1.43, which is less than the pre-merger EPS.

User Contributed Comments 2

User Comment
mazen1967 p/e for company b is grater than b so the answer is no
Shanax P/E of A should be greater than P/E of B for bootstrap effect
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