Question

Your company has earnings per share of $4.

It has 1 million shares​ outstanding, each of which has a price of $43.

You are thinking of buying​ TargetCo, which has earnings per share of $3​, 1 million shares​ outstanding, and a price per share of $21.

You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offer an exchange ratio such​ that, at current​ pre-announcement share prices for both​ firms, the offer represents a 15% premium to buy TargetCo. Assume that 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. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover.

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

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Answer:

1. Computation of Price per share of Combined corporation

Target Co. Premium per share = Current Price of Target * 15%

Target Co. Premium per share = 21 * 15%

Target Co. Premium per share = 3.15

Target Co. Share Price for Acquisition = $3.15 + $21 = $24.15

No of Shares are Issued = Share Price * Share O/s / Current Our Co. Price

No of Shares are Issued = $24.15 * 1000000 / 43

No of Shares are Issued = 561627.907~ 561628 Shares

Total Shares After Merger = 1561628 Shares

Price per share after Merger = Total Value before acquisition / Shares after acquisition

Price per share after Merger = (43 + 21) *1000000 / 1561628

Price per share after Merger = $40.983

1.Value of Combined Corporation = 561627.907 * 40.983 / 1000000

Value of Combined Corporation = $23.02

2. Price of Your Company = $40.983

3. Price of Target Co. = $40.983

4. Actual Premium = (23.0172 / 21) - 1

Actual Premium = 9.6057%