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		6,000			1,200
Price per share	$	47		$	17

  

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,500. Firm T can be acquired for $19 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

Answer 1