AB and EF are located in the same country and prepare their financial statements to 31 October in accordance with International Accounting Standards. EF supplies AB with a component that is vital to AB's product range. AB is considering acquiring a controlling interest in EF by 31 December 20X4 in order to guarantee future supply. The Board of EF has indicated that such an approach would be postively considered. AB would use its control to make AB the sole customer of EF. The Finance Director of AB has been granted access to EF's management accounts and has conducted some initial analysis from the financial press. The results togther with comparisons for AB for the year to 31 October 20X4 are presented below:
AB and EF are forecasting revenues of S1,500,000 and $700,000 respectively for the year ended 31 October 20X5.
AB's Finance Director met with one of the directors of EF to discuss the potential impact of the acquisition.
Which of the director's statements below is correct?
- The P/E ratio of EF will increase to 12 after acquisition in line with that of AB.
- The gross profit margin of EF will increase if AB's bargaining power is used to negotiate lower material costs for the whole group.
- Redundancy costs arising from reorganisation following acquisition will be provided for by charging EF's profit for the year ended 31 October 20X4.
- Dividend yield for both entities will be identical after the acquisition.