Question

Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Shares outstanding Price per share Firm B 5,800 $ 45 Firm T 1,300 $ 16 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,400. Firm T can be acquired for $18 per share in cash or by exchange of stock wherein B offers one of its share for every two of T's share. a. Are the shareholders of Firm T better off with the cash offer or the stock offer? b. At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) . a. Shareholders of Firm T b. Exchange ratio She hange ratio Share offer is better to 1

Answer 1

a.
Cash received per share	$18.00
Value of stock	$22.50	45*(1/2)
The stock value is higher and thus firm T would prefer stock offer
b.
Calculation of exchange ratio which would make the shareholder's indifferent between the two options
Let exchange ratio be x
Total shares of new firm	5800+(1300x)		1
Value of firm after merger	(5800*45)+(1300*16)+9400
Value of firm after merger	291200
Price of share after merger (P)	291200/(5800+1300x)		2
The value for shareholders under both option should be equal
1300Px = (1300*18)
P = (18/x)			3
Substituting equation 3 in 2 we get
291200/(5800+1300x)	(18/x)
291200x	104400+23400x
291200x-23400x	104400
267800x	104400
x	104400/267800
x	0.3898
Exchange ratio	0.3898	to 1