Consider the following premerger information about a bidding firm (Firm B) and a
ID: 2797591 • 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 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 shares.
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.)
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.
Explanation / Answer
COST OF ACQUISITION FOR FIRM B
1) CASH OFFER : NO OF SHARES x PRICE / SHARE
1300 X 18 = $ 23400
2) STOCK OFFER
STOCK SWAP RATIO - 1 : 2 ( ONE SHARE OF B FOR EVERY SHARE OF T )
SO 650 X 45 = $ 29,200
FROM THE ABOVE CALCULATION IT IS CLEAR THAT THE COST OF ACQUISITION IS LEAST FOR CASH OFFER.
SO CASH OFFER IS BETTER