Assume the following information:

• Firm A will acquire firm B; Firm A will pay for the acquisition in stock
• This is a non-synergistic merger

Bidder firm: Target firm:

Firm A Firm B

1. P/E ratio 20 10

2. # shares outstanding 480 100

3. Total earnings $1,200 $400

a) Assume the market is fooled. Calculate the post-merger stock price of Firm A.

b) Assume the market is smart. Calculate the post-merger P/E ratio of Firm A.