Consider the following pre-merger information about a bidding firm (firm B) and a target firm (Firm T).

Firm B Shares outstanding 6,400

Firm B Price per share £53

Firm T Shares outstanding 1,500

Firm T Price per share £19

Firm B has estimated that the value of the synergistic benefits from acquiring firm T is £17,000.

If Firm T is willing to be acquired for £23 per share in cash, what is the NPV of the merger? What is the merger premium? What will the price per share of the merged firm be? Explain your calculations carefully.

Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its shares for every two of T’s shares, what will the price per share of the merged firm be? What is the NPV of the merger? Explain your calculations carefully.

Indicate whether you think the following claims regarding takeovers are true or false. In each case, provide a clear explanation for your answer.

(i) Takeover may reflect the presence of agency problem in the corporation.

(ii) Mergers are a way of avoiding taxes because they allow the acquiring firm to write up the value of the assets of the acquired firm.