11. Assume the Knight Corporation is considering the acquisition of Day, Inc. The expected earnings per share

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11. 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.

a. Compute the coefficient of variation for the Knight Corporation before and after the merger (consult Chapter 13 to review statistical concepts if necessary).

b. Discuss the possible impact on Knight’s postmerger P/E ratio, assuming investors are risk-averse.

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