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

Solution
	Assuming share is given
	Value of share of B firm is $47
	Value of share of B firm is $17
	Excahnge ratio is 1:2
	NO of share in Firm B	6000
	NO of share in Firm t	1200
	NO of share to be given to firm T =1200*1/2
		=600 shares of firm B
		which value is $47*600
			$28,200
	Assuming cash is given
	Firm B give $19 per share held in firm B
		=1200*19
		$22,800
	Share is better option
	Exchange ratio for indifferent two offers are
		=28200-22800
		$5,400
	NO of share to be reduced for beak even no. of share
		=$5400/47
		114.8936	Approx 115 share
		As perivous share no. given is 600
		now,
			=600-115
			485 shares
	Exchange ratio should be = 485/6000
	0.080833333
	Exchange ratio should be 1:12