Question: Corporate Governance: Overstating Earnings. A number of firms, especially in the United States, have had to lower their previously reported earnings due to accounting errors or fraud. Assume that Modern American (problem 7) had to lower its earnings to $5,000,000 from the previously reported $10,000,000. What might be its new market value prior to the acquisition? Could it still do the acquisition?
Problem:
Company P/E ratio Number of shares Market value per share Earnings EPS Total market value
ModoUnico 20 10,000,000 $20.00 $10,000,000 $1.00 $200,000,000
Modern America 40 10,000,000 $40.00 $10,000,000 $1.00 $400,000,000