(a). Company A has 10 million shares in issue and Company B 30 million. On day 1 the

market value per share is 8 for A and 12 for B. On day 2, the management of B

decides, at a private meeting, to make cash takeover bid for A at a price of 12 per share.

The takeover will produce large operating savings with a value of 60 million. On day 5,

B publicly announces an unconditional offer to purchase all shares of A at a price of

12.00 per share with settlement on day 20. Details of the large savings are not

announced and are not public knowledge. On day 15, B announces details of the savings,

which will be derived from the takeover.

Required:

Ignoring tax and the time-value of money between days 1 and 20, and assuming the

details given are the only factors having an impact on the share prices of A and B,

determine the day 2, day 5, and day 15 share prices of A and B if the market is:

1. Semi-strong form efficient, and

2. Strong form efficient

In each of the following circumstances:

(i) the purchase consideration is cash as specified above, and (5 marks)

(ii) the purchase consideration, decided upon on day 2, and publicly announced on

day 5, is one newly issued share of B for each share of A. (5 marks)

(b). Academics have argued and debated that market efficiency can be defined using

three differing strengths; weak form, semi-strong form, and strong form.