Question

12.   The initial offer price for the target firm is defined as:

a.   The minimum price.

b.   The present value of the minimum price plus some fraction of the present value of net synergy.

c.   The present value of net synergy plus the current market value of the target firm.

d.   The maximum price less the minimum price.

e.   The maximum price less the present value of net synergy.

Answer 1

Initial Offer Price of an entity means the price at which its shares are quoted at the first place to its probable buyer/ acquirer firm. For an acquirer firm's point of view the price it offers to its probable target is known as the initial offer price for the target firm.

The present value of the minimum price means the current value of all the minimum prices expected in the future.

Synergy means the gain or profit from the expected deal of merger or acquisition. The present value of net synergy means the current value of net gain expected in future from the deal of acquisiton or merger.

Current market value means the value at which the stock is trading in the market currently.

These all - The present value of the minimum price, The present value of net synergy and the current market value of the target firm can act as initial price measurement basis subject to the mutual valuation decision but they are not the comprehensive meaning of initial price.

The maximum price less the minimum price shows the belt or the range in which the share price moves. It is not an initial offer price.

Any company would want to buy the other company at the lowest price possible. As it would lead to maximum profits after the acquisition.
So, going by the above The initial offer price for the target firm is defined as: Option A- The Minimum Price.