1 Bhina jan 10

Macintosh SuperFood Ltd. had had a lackluster record and, since the death of its founder in late 2000, it had been regarded as a prime target for a takeover bid. On December 31, 2002 its share traded at $ 5. On that day Brandys, a large operator of chain of supermarkets offered to buy Macintosh by exchanging every share of Macintosh for one share of Brandys: it plans to issue 15 million new shares to replace the Macintoshs 15 million existing shares. Brandys traded at $10 on December 31, 2002, thus the take-over offer was doubling (!) the value of Macintosh. Macintoshs CEO and Brandys CEO met on the evening of Jan.2, 2003 and agreed to merge their firms in one year [i.e., on 1/ 02/04].

But Macintoshs CEO demanded and got a small addition to the original offer: on 1/ 02/04 every stockholder of Macintosh will have an option to exchange her Macintosh share for one share of Brandys or to get $10 in cash.

1.What kind of option was given to Macintoshs shareholders by this agreement? 2.Why was there a need to give this option? 3.What was the value of this option on 1/02/03? 4.Who pays for this option? Elaborate

Given: On 1/02/04 Macintosh will become part of Brandys. On that day will trade at one of the two values only: $11 or $8.

T-bill is 4%