Firm A has announced it offers to buy firm B. Just before the announcement, both firms...
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Firm A has announced it offers to buy firm B. Just before the announcement, both firms traded at $10 per share. After, A trades at $9.50, and B at $12. a. A offers to buy B for 1.5 shares of A plus 1 dollar in cash per share of B. Describe how you would set up a "merger arb" strategy that bets on deal completion. I b. What is your profit if the deal goes through? c. What is your loss if the deal is called off, and under which assumptions? d. Would your answer to c. change if you knew that there have been rumors of merger discussions before the announcement? If so, how? Firm A has announced it offers to buy firm B. Just before the announcement, both firms traded at $10 per share. After, A trades at $9.50, and B at $12. a. A offers to buy B for 1.5 shares of A plus 1 dollar in cash per share of B. Describe how you would set up a "merger arb" strategy that bets on deal completion. I b. What is your profit if the deal goes through? c. What is your loss if the deal is called off, and under which assumptions? d. Would your answer to c. change if you knew that there have been rumors of merger discussions before the announcement? If so, how?
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SOLUTION a To set up a merger arb strategy that bets on deal completion you would take the following steps 1 Assess the terms of the offer A offers to buy B for 15 shares of A plus 1 in cash per share ... View the full answer
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