CFA Practice Question

There are 86 practice questions for this study session.

CFA Practice Question

What is the bootstrap effect? When a company acquires another, the acquirer's ______ as a result of the merger transaction itself.

A. stock price increases.
B. EPS figure increase.
C. P/E ratio increases.
Correct Answer: B

Note that the total earnings always increase as long as the two companies are profitable. However, total shares outstanding, the denominator of the EPS, also increases after the merger. The EPS may go up, down or be the same. If the EPS increases just because of the merger transaction, it is referred to as the bootstrap effect.

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