ABC has 1.00 million shares outstanding, each of which has a price of $15. It has made a takeover offer of XYZ Corporation, which has 1 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 $ 3.58 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 0.14. What happens to the price of ABC and XYZ this time? What premium over the current market price does this offer represent?