7. ABC has 1 million shares outstanding, each of which has a price of $20. It has...

Question:

7. 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 to purchase XYZ for $3 million. Does that mean that your answers to

(a) and

(b) must be identical? Explain.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Fundamentals Of Corporate Finance

ISBN: 9781292018409

3rd Global Edition

Authors: Berk, Peter DeMarzo, Jarrad Harford

Question Posted: