Bootstrapping earnings. Assume that Firm 1 issues additional shares to buy Firm 2 In scenario A, assume that the market applies the pre-merger P/E of Firm 1 to post-merger earnings In Scenario B, assume that the market applies the weighted average P/E to the post-merger company. *Weighted average P/E is calculated by multiplying PE of each firm by its share of combined earnings and summing the two results Firm 2 Firm 1 A $200 $80 Earnings Number of shares 100 80 120 120 $2 $1 Earnings per share P/E 20 10 20 $40 $10 Price per share Market value of $4,000 $800 stock Bootstrapping earnings. Assume that Firm 1 issues additional shares to buy Firm 2 In scenario A, assume that the market applies the pre-merger P/E of Firm 1 to post-merger earnings In Scenario B, assume that the market applies the weighted average P/E to the post-merger company. *Weighted average P/E is calculated by multiplying PE of each firm by its share of combined earnings and summing the two results Firm 2 Firm 1 A $200 $80 Earnings Number of shares 100 80 120 120 $2 $1 Earnings per share P/E 20 10 20 $40 $10 Price per share Market value of $4,000 $800 stock