ABC has 1.00 million shares? outstanding, each of which has a price of $19. It h
ID: 2658739 • Letter: A
Question
ABC has 1.00 million shares? outstanding, each of which has a price of $19. It has made a takeover offer of XYZ? Corporation, which has 1.00 million shares? outstanding, and a price per share of $2.29. Assume that the takeover will occur with certainty and all market participants know this.? Furthermore, there are no synergies to merging the two firms.
a. Assume ABC made a cash offer to purchase XYZ for $3.47 million. What happens to the price of ABC and XYZ on the?announcement? What premium over the current market price does this offer? represent?
After ABC makes a cash offer to purchase XYZ for $3.47 ?million, the price of XYZ is ___________ per share. ? (Round to the nearest? cent.)
This represents a premium of ___________ ?(Round to one decimal? place.)
The price of ABC is ___________ per share. ?(Round to the nearest? cent.)
b. Assume ABC makes a stock offer with an exchange ratio of 0.16. What happens to the price of ABC and XYZ this? time? What premium over the current market price does this offer? represent?
After ABC makes a stock offer with an exchange ratio of 0.16 the price of ABC is ___________ per share.???(Round to the nearest?cent.)
The price of XYZ is ___________ per share. ?(Round to the nearest? cent.)
This represents a premium of ___________ ?(Round to one decimal? place.)
c. At current market? prices, both offers are offers to purchase XYZ for $3.47 million. Does that mean that your answers to parts ?(a?) and ?(b?) must be? identical? Explain.
At current market? prices, both offers are offers to purchase XYZ for $3.47 million. Does that mean that your answers to parts (a?) and (b?) must be? identical? Explain. ?(Select from the? drop-down menus.)
[YES/NO]?, the premium in the stock offer is [HIGHER/LOWER] because market prices change to reflect the fact that ABC shareholders are giving XYZ shareholders money because they are paying a premium.? Thus, on the announcement XYZ stock goes [UP/DOWN] and ABC stock goes [UP/DOWN]?, which [INCREASES/REDUCES] the premium relative to the cash offer.
Explanation / Answer
a ABC made a cash offer to purchase XYZ for $ 3.47 million After ABC makes a cash offer to purchase XYZ for $ 3.47 million, the price of XYZ is Cash Price offered/No of shares outstanding of XYZ $ 3.47 m/1 $3.47 Price of XYZ is $ 3.47 This represents a premium of (3.47-2.29) $1.18 1.18/2.29 51.53% The price of ABC is (Old price - Premium*2.29 19-(51.53%*2.29) 17.82 $17.82 b After ABC makes a stock offer with an exchange ratio of 0.16 the price of ABC is ___________ per share 1 share of XYZ 0.16 share of ABC 0.16 million shares Combined entity value = (19+2.29)/1.16 18.35 Value of share of ABC would be $ 18.35 Price of 0.16 million share = 0.16m*19 3.04 3.04m/1m $3.04 Price of XYZ share is $ 3.04 This represents a premium of (3.04-2.29)/2.29 0.75 0.75/2.29 32.75% c No they are not identical, the premium in the stock price is lower because market prices change to reflect the fact that ABC shareholders are giving XYZ shareholders money because they are paying a premium. Thus, on the annoucement XYZ stock goes UP and ABC stock goes DOWN which REDUCES the premium relative to the cash offer