ABC has 1 million shares outstanding, each of which has a price of $24. It has made a takeover offer of XYZ Corporation which has 1 million shares outstanding, and a price per share of $2.39. Assume that the takeover will occur with certainty and all market participants know this. Furthermore, there are no synergies to merging the two firms. a. Assume ABC made a cash offer to purchase XYZ for $5.04 million. What happens to the price of ABC and XYZ on the announcement? What premium over the current market price does this offer represent? b. Assume ABC makes a stock offer with an exchange ratio of 0.21. What happens to the price of ABC and XYZ this time? What premium over the current market price does this offer represent? c. At current market prices, both offers are offers to purchase XYZ for $5.04 million. Does that mean that your answers to parts (a) and (b) must be identical? Explain. a. Assume ABC made a cash offer to purchase XYZ for $5.04 million. What happens to the price of ABC and XYZ on the announcement? The price of XYZ is on the announcement is $ per share. (Round to the nearest cent.) The premium over the current market price is %. (Round to the nearest two decimal places.) per share. (Round to the nearest cent.) The price of ABC on the announcement is $ b. Assume ABC makes stock offer with an exchange ratio of 0.21. What happens to the price of ABC and XYZ this time? The price of ABC is $ per share. (Round to the nearest cent.) The price of XYZ is $ per share. (Round to the nearest cent.) The premium over the current market price will be %. (Round to the nearest decimal place.) c. At current market prices, both offers are offers to purchase XYZ for $5.04 million. Does that mean that your answers to parts (a) and (b) must be identical? Explain. (Select from the drop-down menus.)
ABC has 1 million shares outstanding, each of which has a price of $24. It has made a takeover offer of XYZ Corporation which has 1 million shares outstanding, and a price per share of $2.39. Assume that the takeover will occur with certainty and all market participants know this. Furthermore, there are no synergies to merging the two firms. a. Assume ABC made a cash offer to purchase XYZ for $5.04 million. What happens to the price of ABC and XYZ on the announcement? What premium over the current market price does this offer represent? b. Assume ABC makes a stock offer with an exchange ratio of 0.21. What happens to the price of ABC and XYZ this time? What premium over the current market price does this offer represent? c. At current market prices, both offers are offers to purchase XYZ for $5.04 million. Does that mean that your answers to parts (a) and (b) must be identical? Explain. a. Assume ABC made a cash offer to purchase XYZ for $5.04 million. What happens to the price of ABC and XYZ on the announcement? The price of XYZ is on the announcement is $ per share. (Round to the nearest cent.) The premium over the current market price is %. (Round to the nearest two decimal places.) per share. (Round to the nearest cent.) The price of ABC on the announcement is $ b. Assume ABC makes stock offer with an exchange ratio of 0.21. What happens to the price of ABC and XYZ this time? The price of ABC is $ per share. (Round to the nearest cent.) The price of XYZ is $ per share. (Round to the nearest cent.) The premium over the current market price will be %. (Round to the nearest decimal place.) c. At current market prices, both offers are offers to purchase XYZ for $5.04 million. Does that mean that your answers to parts (a) and (b) must be identical? Explain. (Select from the drop-down menus.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:ABC has 1 million shares outstanding, each of which has a price of $24. It has made a takeover offer of XYZ Corporation which has 1 million shares outstanding, and a price per share of $2.39.
Assume that the takeover will occur with certainty and all market participants know this. Furthermore, there are no synergies to merging the two firms.
a. Assume ABC made a cash offer to purchase XYZ for $5.04 million. What happens to the price of ABC and XYZ on the announcement? What premium over the current market price does this
offer represent?
b. Assume ABC makes a stock offer with an exchange ratio of 0.21. What happens to the price of ABC and XYZ this time? What premium over the current market price does this offer represent?
c. At current market prices, both offers are offers to purchase XYZ for $5.04 million. Does that mean that your answers to parts (a) and (b) must be identical? Explain.
a. Assume ABC made a cash offer to purchase XYZ for $5.04 million. What happens to the price of ABC and XYZ on the announcement?
The price of XYZ is on the announcement is $
per share. (Round to the nearest cent.)
The premium over the current market price is
%. (Round to the nearest two decimal places.)
The price of ABC on the announcement is $
per share. (Round to the nearest cent.)
b. Assume ABC makes a stock offer with an exchange ratio of 0.21. What happens to the price of ABC and XYZ this time?
The price of ABC is $
per share. (Round to the nearest cent.)
The price of XYZ is $
per share. (Round to the nearest cent.)
The premium over the current market price will be
%. (Round to the nearest decimal place.)
rrent market prices, both offers are offers to purchase XYZ for $5.04 million. Does that mean that your answers to parts (a) and (b) must be identical? Explain. (Select from the drop-down
c. At
menus.)
Transcribed Image Text:c. At current market prices, both offers are offers to purchase XYZ for $5.04 million. Does that mean that your answers to parts (a) and (b) must be identical? Explain. (Select from the drop-down
menus.)
the premium in the stock offer is
Thus, on the announcement XYZ stock goes
because market prices change to reflect the fact that ABC shareholders are giving XYZ shareholders money because they are paying a premium.
and ABC stock goes
which
the premium relative to the cash offer.
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