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Company A has a market value of equity of $2,000 million and 80 million shares outstanding. Company B has a market value of equity of
Company A has a market value of equity of $2,000 million and 80 million shares outstanding. Company B has a market value of equity of $400 million and 25 million shares outstanding. Company A announces at the beginning of 2019 that is going to acquire Company B. The projected pre-tax gains in operating income (in millions of $) from the merger are: | |||||||||
2019 | 2020 | 2021 | 2022 | 2023 | |||||
Pre-tax Gains in Operating Income | 12 | 16 | 28 | 38 | 45 | ||||
The projected pre-tax gains in operating income are expected to grow at 4% after year 2023. The company is using a discount rate of 8% to value the synergies. The marginal corporate tax rate is 35%. Company A has decided to pay a $300 million premium for Company B. Assume that capital markets are efficient and that there is a 100% probability the deal will be closed. | |||||||||
Question 3.a | By how much the price per share of Company A would change at the time of the announcement of the acquisition? | ||||||||
Question 3.b | If Company A were to make a 100% stock offer for Company B, what would the exchange ratio be? Remember that the exchange ratio is the number of Company As shares that the shareholders of Company B will receive in exchange for each of their shares. | ||||||||
Question 3.c | If Company A were to offer 0.80 share of Company A for each share of company B, by how much the price per share of Company A would change at the time of the announcement of the acquisition? |
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