Cash versus Equity as Payment Consider the following premerger information about a bidding firm (firm B) and

Question:

Cash versus Equity as Payment 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 1,500 900 Price per share (£)

34 24 Firm B has estimated that the value of the synergistic benefits from acquiring firm T is

£3,000.

(a) If firm T is willing to be acquired for £27 per share in cash, what is the NPV of the merger?

(b) What will the price per share of the merged firm be, assuming the conditions in (a)?

(c) In part (a), what is the merger premium?

(d) Suppose firm T is agreeable to a merger by an exchange of equity. If B offers three of its shares for every one of T’s shares, what will the price per share of the merged firm be?

(e) What is the NPV of the merger assuming the conditions in

(d)?

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