When Firm A acquired Firm B, no incremental value was created but earnings per share increased. If the financial markets are astute, the price-earnings ratio of Firm A should ____ and the stock price of Firm A should _____.

A) decrease; decrease
B) decrease; increase
C) decrease; remain constant
D) increase; decrease
E) increase; increase

Price-Earnings Ratio

A valuation metric for a stock, calculated by dividing the current market price of the stock by its earnings per share.

Incremental Value

The additional or extra value generated by making a specific business decision, considered when evaluating multiple options.

Earnings per Share

A financial ratio indicating the portion of a company's profit allocated to each outstanding share of common stock, serving as an indicator of the company’s profitability.