Consider the following premerger information about a bidding firm (Firm B) and a
ID: 2718311 • Letter: C
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. Firm B Firm T Shares outstanding 5,600 2,200 Price per share $ 45 $ 19 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,300. Firm T can be acquired for $21 per share in cash or by exchange of stock wherein B offers one of its share for every two of T's shares. Are the shareholders of Firm T better off with the cash offer or the stock offer? Cash offer is better Share offer is better 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.) Exchange ratio
Explanation / Answer
Cash Offer:
Value of shares received by shareholders of firm T = 2200 * 21 = 46200
Stock offer:
Swap ratio = 1:2
Value of shares received by shareholders of firm T = (2200*1/2) * 45 = 49500
By comparing the above value, it can be concluded that Stock offer is better as compared to cash offer.
Shareholders of T be indifferent between the two offers when they will have 46200 value in stock offer
Exchange ratio = 46200/(45*2200) = 0.4667