Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 28, Problem 15P
ABC has 1 million shares outstanding, each of which has a price of $20. It has made a takeover offer of XYZ Corporation, which has 1 million shares outstanding and a price per share of $2.50. 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 $3 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 0.15. 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 $3 million. Does that mean that your answers to parts (a) and (b) must be identical? Explain.
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Students have asked these similar questions
e. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction.
If Rearden pays no premium to buy Associated Steel, then Rearden's price-earnings ratio after the merger will be closest to:
10.0.
10.42.
12.0.
7.8.
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).
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
Price per share
6,000
1,200
$
47 $
17
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,500.
a. If Firm T is willing to be acquired for $19 per share in cash, what is the NPV of the merger? (Do not
round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
b. What will the price per share of the merged firm be assuming the conditions in (a)? (Do not round
intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
c. If Firm T is willing to be acquired for $19 per share in cash, what is the merger premium? (Do not round
intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
d. Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its shares for…
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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