Lets suppose that we have two companies: Firm A is a high tech firm and Firm B is a consumer staples firm.

They have the same earnings of $5M a year and the same number of shares, 1M.

a/ What is the earnings per share for each firm?

b/ Firm A stock sells at $125 while Firm Bs stock sells at $50 because it is a less fancy industry.

What is their P/E ratio?

c/ Then Firm A would like to merge with Firm B, so they make a stock-to-stock offer, at the rate of two for three. The stockholder from Firm B approved the merger.

What is the earning per share of the combined firm?

d/ If the market is using the P/E ratio of Firm A to value the stock, what should be the value of the stock of the combined firm?