AAA Ltd. is considering making an offer to acquire BBB Ltd. Before the announcement, AAA has a market value of $6 million and its shares are trading at $40 per share. BBB has 50,000 shares outstanding with a share price of $15. BBB can be acquired for $22 per share in cash or by exchange of stocks wherein AAA offers one of its share for every two of BBB's shares. The value of BBB to AAA is expected to be $1.6 million.

(a) What is the incremental value of the acquisition to AAA? (1 mark)

(b) Should AAA make a cash offer or a stock offer? Show all necessary calculations. (5 marks)

(c) Suppose the market currently estimates a 60 percent probability that AAA will go ahead with the acquisition with a stock offer. What will the market value of AAA be immediately after the announcement of the acquisition? (4 marks)

(d) At what exchange ratio of AAA shares to BBB shares, would the shareholders in BBB be indifferent between a stock offer and the cash offer? You dont need to consider the probability of acquisition in this part. (7 marks)