2.You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company. UnderWaters stock price is $20, and it has 2 million shares outstanding(and no debt). You believe that if you buy the company and replace its management, its value will increase by 40%. You are planning on doing a leveraged buyout of UnderWater, and will offer $25 per share for control of the company.

(a)Assuming you get 50% control, what will happen to the price of non-tendered shares?

(b)Given the answer in part (a), will shareholders tender their shares, not tender their shares, or be indifferent?

(c)Combing your answers in part (a) and (b), what will your gain from the transaction be?

(d)Extending our discussion in part (c), how can you extract a maximum gain (more specifically, how to design the LBO plan)? What wouldbethe maximum amount of gain you can extract?