Question: Assume the Shelton Corporation is considering the acquisition of Cook, Inc. The expected earnings per share for the Shelton Corporation will be $3.00 with or without the merger. However, the standard deviation of the earnings will go from $1.89 to $1.20 with the merger because the two firms are negatively correlated.
a. Compute the coefficient of variation for the Shelton Corporation before and after the merger.
b. Comment on the possible impact on Shelton's postmerger P/E ratio, assuming investors are risk-averse.