ABC has

1

million shares outstanding, each of which has a price of

$18.

It has made a takeover offer of XYZ Corporation which has

1

million shares outstanding, and a price per share of

$2.66.

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

$3.4

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

0.1889.

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 offers to purchase XYZ for

$3.4

million. Does that mean that your answers to parts

(a)

and

(b)

must be identical? Explain.

Question content area bottom

Part 1

a. Assume ABC made a cash offer to purchase XYZ for

$3.4

million. What happens to the price of ABC and XYZ on the announcement? What premium over the current market price does this offer represent?After ABC made a cash offer to purchase XYZ for

$3.4

million, the price of XYZ is

$enter your response here

per share. (Round to the nearest cent.)

Part 2

This represents a premium of

enter your response here%.

(Round to one decimal place.)

Part 3

The price of ABC is

$enter your response here

per share.(Round to the nearest cent.)

Part 4

b. Assume ABC makes a stock offer with an exchange ratio of

0.1889.

What happens to the price of ABC and XYZ this time? What premium over the current market price does this offer represent?After ABC makes a stock offer with an exchange ratio of

0.1889,

the price of ABC is

$enter your response here

per share.(Round to the nearest cent.)

Part 5

The price of XYZ is

$enter your response here

per share.(Round to the nearest cent.)

Part 6

This represents a premium of

enter your response here%.

(Round to one decimal place.)

Part 7

c. At current market prices, both offers are offers to purchase XYZ for

$3.4

million. Does that mean that your answers to parts

(a)

and

(b)

must be identical? Explain. (Select from the drop-down menus.)

Yes

No

, the premium in the stock offer is

lower

higher

because market prices change to reflect the fact that ABC shareholders are giving XYZ shareholders money since they are paying a premium. Thus, on the announcement XYZ stock goes

up

down

and ABC stock goes

down

up

, which

increases

reduces

the premium relative to the cash offer.