Assume the Knight Corporation is considering the acquisition of Day, Inc. The expected earnings per share for the Knight Corporation will be $4.00 with or without the merger. However, the standard deviation of the earnings will go from $2.40 to $1.60 with the merger because the two firms are negatively correlated.
Compute the coefficient of variation for the Knight Corporation before and after the merger.
Discuss the possible impact on Knight's postmerger P/E ratio, assuming investors are risk-averse.© BrainMass Inc. brainmass.com June 3, 2020, 11:08 pm ad1c9bdddf
CV before the merger = 2.40/4.00=0.60
CV after the merger = 1.60/4.00=0.40
As the investors are risk ...
The solution examines the portfolio effect of a merger. The coefficient of variation for the Knight Corporation before and after the merger is computed.