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. Shares outstanding Price per share Firm B Firm T 5,200 $ 52 1,100 $22 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $7,800. Firm T can be acquired for $24 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? Cash offer is better

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
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Chp 26 Q 5

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 5,200
Price per share
$52
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is
$7,800. Firm T can be acquired for $24 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?
Cash offer is better
Share offer is better
1,100
$22
Exchange ratio
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 answ to 4 decimal places, e.g., 32.1616.)
Transcribed Image Text: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 5,200 Price per share $52 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $7,800. Firm T can be acquired for $24 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? Cash offer is better Share offer is better 1,100 $22 Exchange ratio 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 answ to 4 decimal places, e.g., 32.1616.)
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