Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 28, Problem 14P
Let’s reconsider part (b) of Problem 99. The actual premium that your company will pay for TargetCo will not be 20%, because on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for TargetCo. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover.
- a. What is the price per share of the combined corporation immediately after the merger is completed?
- b. What is the price of your company immediately after the announcement?
- c. What is the price of TargetCo immediately after the announcement?
- d. What is the actual premium your company will pay?
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Suppose you own stock in a company. The current price per share is P25.00. Another company has just announced that it wants to buy your company and will pay P35.00 per share to acquire all the outstanding stock. Your company’s management immediately begins fighting off this hostile bid. Is management acting in the shareholders’ best interests? Why or why not?
6. IPO price stabilization
Which of the following strategies can underwriters use to prevent institutional investors from flipping? Check all that apply.
They can require an overallotment clause in the underwriting agreement of the IPO.
They can agree to make more shares of future IPOS available to investors that hold on to the initial shares for a relatively long period of
time.
They can require a lockup clause in the underwriting agreement of the IPO.
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3. Suppose you are the sole owner of company ABC. The market value of your company is
$100 and there are 20 shares. Now you are thinking about acquiring the target company
XYZ with a standing alone market value of $50 with 25 shares outstanding. The synergy
of the two companies is $20. We assume the cost of the merger is zero, meaning target
shareholders break even.
a) Suppose you pay XYZ's shareholders in cash from your company ABC. What is the
total firm value post-merger? What is the share price?
b) Suppose you instead create new shares to pay XYZ's shareholders. How many shares
do you need to create? How many shares do you need to pay for each share in XYZ?
Instead of $20, in the remainder of the question, we assume the synergy is -$10.
c) Redo part a) under the new synergy. Would you choose to acquire company XYZ? Discuss
your finding in comparison with a).
Chapter 28 Solutions
Corporate Finance
Ch. 28.1 - Prob. 1CCCh. 28.1 - Prob. 2CCCh. 28.2 - On average, what happens to the target share price...Ch. 28.2 - Prob. 2CCCh. 28.3 - What are the reasons most often cited for a...Ch. 28.3 - Prob. 2CCCh. 28.4 - Prob. 1CCCh. 28.4 - What do risk arbitrageurs do?Ch. 28.5 - Prob. 1CCCh. 28.5 - Prob. 2CC
Ch. 28.6 - Prob. 1CCCh. 28.6 - Prob. 2CCCh. 28 - What are the two primary mechanisms under which...Ch. 28 - Prob. 2PCh. 28 - What are some reasons why a horizontal merger...Ch. 28 - Prob. 4PCh. 28 - Prob. 5PCh. 28 - Prob. 6PCh. 28 - How do the carryforward and carryback provisions...Ch. 28 - Diversification is good for shareholders. So why...Ch. 28 - Your company has earnings per share of 4. It has 1...Ch. 28 - If companies in the same industry as TargetCo...Ch. 28 - Prob. 11PCh. 28 - Prob. 12PCh. 28 - Prob. 13PCh. 28 - Lets reconsider part (b) of Problem 99. The actual...Ch. 28 - ABC has 1 million shares outstanding, each of...Ch. 28 - Prob. 16PCh. 28 - How does a toehold help overcome the free rider...Ch. 28 - Prob. 18P
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