Portfolio effect of merger

Reference no: EM1344049

Suppose 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.

Calculate 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.

Reference no: EM1344049

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