Consider the following premerger information about a bidding firm (Firm B) and a
ID: 2818007 • 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 5,200 1,800 Price per share $ 43 $ 18 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,100. Firm T can be acquired for $20 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? Share offer is better Cash 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 _ to 1
Explanation / Answer
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x = 0.45395
Thus at the indifference point, the ratio of shares shall be 0.45395:1
If more shares are offered, the share payout is beneficial and if lesser shares are offered that the cash payout is beneficial to the shareholders of T.
No of Shares Outstanding Price per share Total Firm B 5200 43 223600 Firm T 1800 18 32400 Synergy Value 9100 Total value without minusing cash payout if any 265100 Options Payout received by shareholders of Firm T if cash opted 36000 (20*1800) Payout received by shareholders of Firm T if shares opted (Value) No of shares received = 1800/2= 900 shares. Total shares of the company shall be 5200 + 900 = 6100. Thus value of the payout is $265100*900/6100 39113.11475 As we see that value of payout is higher when opted for shares, T shareholders should opt for this option.