Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Estimated synergy and cash offer per share are given below..

a) What is the value of the merged company?

b) Suppose Firm T is agreeable to a merger by an exchange of stock. B's share offer is shown below. What is the cash equivalent per T share of the share offer?

c) Which offer will shareholders of T prefer - cash or B shares for T shares? Why?

d) At what exchange ratio of B shares to T shares, the shareholders in T would be indifferent between the two offers?

Firm B Firm T Shares outstanding 3,000 2,000 Price per share S 30.00 $ 50.00 Estimated Synergy Cash offer $50,000 $60.00 Solution a) What is the value of the merged company? Merged company value Before Cash Payout b) Suppose Firm T is agreeable to a merger by an exchange of stock. B's share offer is shown below. What is the cash equivalent per T share of the share offer? Shares of B offered per one share of T 2.0000 Total number of shares after exchange Value per B share Cash equivalent per T share of share offer c) Which offer will shareholders of T prefer- cash or shares for T shares? Why? Your answer d) At what exchange ratio of B shares to shares, the shareholders in T would be indifferent between the two offers? Implied target firm pre-merger value The new share price of B Total number of shares that target firm should get Shares offered (total) B shares offered per one T share