Question

Your company has earnings per share of $3. It has 1 million shares​ outstanding, each of which has a price of $45. You are thinking of buying​ TargetCo, which has earnings of $3 per​ share, 1 million shares​ outstanding, and a price per share of $24. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offered an exchange ratio such​ that, at current​ pre-announcement share prices for both​ firms, the offer represents a 22% premium to buy TargetCo. ​ However, the actual premium that your company will pay for TargetCo when it completes the transaction will not be 22%​, because on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for TargetCo without any synergies. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover​ (ignore time value of​ money).

a. What is the price per share of the combined corporation immediately after the merger is​ completed?

b. What is the price of your company immediately after the​ announcement?

c. What is the price of TargetCo immediately after the​ announcement?

d. What is the actual premium your company will​ pay?

Answer 1

Answer:

From the given data,

current price per share of ==> $24

==>22% of premium, then we get

24 * 22% ==> 5.28

then the Offer price will be ==> 24 + 5.28 ==> $29.28

Company has price of ==>$45

then by appying exchange ration, we get that==> 29.28 / 48 ==> 0.650

A)

The price per share after the merger is​ completed:

==> (45 + 24) / ( 1 + 0.650)

==> 41.8181

B)

The price of your company immediately after the​ announcement will be the same price of price per share after the merger is​ completed.

Therefore, price of your company after the​ announcement==> 41.8181

C)

The price of TargetCo after the​ announcement

==>(41.8181 * 1 million shares​ * 0.650)

==>27.18

D)

The actual premium of your company will pay is

==> (27.18/24) - 1

==> 1.1325 - 1

==> 0.1325

==> 13.25%

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