Could you solve for question (c) and explain it? Since the information of question (a) and (b) may be needed to answer (c), I posted them and their answers at the end.

You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company. UnderWaters stock price is $20, and it has 2 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 40%. You are planning on doing a leveraged buyout of UnderWater, and will offer $25 per share for control of the company.

c) What will your gain from the transaction be?

a) Assuming you get 50% control, what will happen to the price of non-tendered shares? Answer: In a leveraged buy-out, generally expected improvements resulting out of any changes made after buy-out reflects in the share prices. So, in this transaction, the value of the company will be $40 million + 40% of $40 million = $56 million. To get 50% control of the company, you need to buy 1 million shares. Amount required to buy 1 million share = $25 x 1 million = $25 million. Since its a leveraged buy-out, you need to borrow money to purchase the shares, which will be pledged as collateral and then the loan will be assigned to company, once you get the control over company. So, the value of the equity will be => $56 million - $25 million (loan amount) = $31 million. Price per share = $31 million / 2 million = $15.50. So, UnderWaters stock prices will drop to $15.50.

b) Given the answer in part (a), will shareholders tender their shares, not tender their shares, or be indifferent? Answer: They will tender their shares because the price of non-tendered shares are lower than offered price.