ABC has

1.00

million shares outstanding, each of which has a price of

$16.

It has made a takeover offer of XYZCorporation, which has

1.00

million shares outstanding, and a price per share of

$2.54.

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

$3.02

million. What happens to the price of ABC and XYZ on theannouncement? What premium over the current market price does this offer represent?

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

0.15.

What happens to the price of ABC and XYZ thistime? What premium over the current market price does this offer represent?

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

$3.02

million. Does that mean that your answers to parts

(a)

and

(b)

must be identical? Explain.