Question
Case Corp in considering acquiring Western Tech. Their current stock price, number of shares outstanding and balance sheets are below: Assets $7 million Debt $2
Case Corp in considering acquiring Western Tech. Their current stock price, number of shares outstanding and balance sheets are below:
Assets $7 million | Debt $2 million |
Equity $5 million
(200,000 shares at $25 each) |
Assets $60 million | Debt $10 million |
Equity $50 million
(1M shares at $50 each) |
Case Corp (pre-deal) Western Tech
Case Corp closing price: $50 Western Tech closing price: $25 Shares outstanding: 1,000,000 Shares outstanding: 200,000
Suppose that Case Corp will announce the acquisition tomorrow, but is still unsure on how to finance the deal. Analyze the three scenarios below:
- What is the premium offered for the stock? (1 pts)
- Discuss why this premium may be different from the premium in the all-cash deal? (1 pts)
- How much will it cost Case Corp to finance this deal (buying all outstanding shares)? (1 pts)
- What is the exchange ratio? (1 pts)
- If you were a Western Tech shareholder and owned 25 shares, how many shares of Case Corp will you receive? (1 pts)
- Calculate Case Corps leverage ratio after acquiring Western Tech. Keep in mind that only new equity was issued to finance this deal. (1 pts)
- How many shares will Case Corp have to issue in order to finance this deal? (1 pts)
- Western Tech shareholders will now own shares of Case Corp. What percentage of ownership will Western Techs shareholders have over Case Corp? (1 pts)
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