Question

Abbott Corporation has 40,000 shares outstanding at a market price per share of $24. Baxter Corporation has 130,000 shares outstanding at a market price of $38 a share. Neither firm has any debt. Baxter is acquiring Abbott for $1,200,000 in cash. What is the merger premium per share?

		$5.80
		$6.00
		$6.20
		$6.40
		$6.60

Answer 1

Solution:

As per the information given in the question we have

Market price per share of Abbott Corporation before merger = $ 24

No. of shares outstanding of Abbott Corporation = 40,000

Consideration offered by Baxter to Abbott = $ 1,200,000

Thus Offer price per share to Abbott Corporation  = Consideration offered by Baxter to Abbott / No. of shares outstanding of Abbott Corporation

= $ 1,200,000 / 4,000

= $ 30

Thus the offer price per share to Abbott Corporation = $ 30

The formula for calculating the merger premium per share is

= Offer Price per share - Market price per share before merger

As per the information available we have

Offer Price per share = $ 30   ;   Market price per share before merger = $ 24

Applying the above values in the formula for merger premium per share we have Merger premium per share as follows :

= $ 30 - $ 24

= $ 6

Thus the merger premium per share to Abbott Corporation = $ 6.00

The solution is Option 2 = $ 6.00