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