ABC has 1.00 million sharesoutstanding, each of which has a price of $16. It has made a takeover offer of XYZCorporation, which has 1.00 million sharesoutstanding, and a price per share of $2.72. 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 $3.96 million. What happens to the price of ABC and XYZ on theannouncement? What premium over the current market price does this offerrepresent?

b. Assume ABC makes a stock offer with an exchange ratio of 0.14. What happens to the price of ABC and XYZ thistime? What premium over the current market price does this offerrepresent?

c. At current marketprices, both offers are offers to purchase XYZ for $3.96 million. Does that mean that your answers to parts (a) and (b) must beidentical? Explain.