Company A has 8 million shares in issue and Company B 16 million. On day 1 the market value per share is 5 for A and 7.50 for B. On day 2, the management of B decides, at a private meeting, to make cash takeover bid for A at a price of 7.50 per share. The takeover will produce large operating savings with a value of 25 million. On day 5, B publicly announces an unconditional offer to purchase all shares of A at a price of 7.50 per share with settlement on day 20. Details of the large savings are not announced and are not public knowledge. On day 15, B announces details of the savings, which will be derived from the takeover.

Required:

Ignoring tax and the time-value of money between days 1 and 20, and assuming the details given are the only factors having an impact on the share prices of A and B, determine the day 2, day 5, and day 15 share prices of A and B if the market is:

1. Semi-strong form efficient, and 2. Strong form efficient

In each of the following circumstances:

(i) the purchase consideration is cash as specified above, and(7 marks) (ii) the purchase consideration, decided upon on day 2, and publicly announced onday 5, is one newly issued share of B for each share of A.(8 marks)