Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Dumb Jack Ltd. is considering making an offer to acquire Smart Smith Ltd. Before the announcement, Dumb Jack has a market value of $6 million

Dumb Jack Ltd. is considering making an offer to acquire Smart Smith Ltd. Before the announcement, Dumb Jack has a market value of $6 million and its shares are trading at $40 per share. Smart Smith has 50,000 shares outstanding with a share price of $15. Smart Smith can be acquired for $22 per share in cash or by exchange of stocks wherein Dumb Jack offers one of its share for every two of Smart Smiths shares. The value of Smart Smith to Dumb Jack is expected to be $1.6 million.

(a) What is the incremental value of the acquisition to Dumb Jack? (1 mark)

(b) Should Dumb Jack make a cash offer or a stock offer? Show all necessary calculations. (5 marks)

(c) Suppose the market currently estimates a 60 percent probability that Dumb Jack will go ahead with the acquisition with a stock offer. What will the market value of Dumb Jack be immediately after the announcement of the acquisition? (4 marks)

(d) At what exchange ratio of Dumb Jack shares to Smart Smith shares, would the shareholders in Smart Smith be indifferent between a stock offer and the cash offer? You dont need to consider the probability of acquisition in this part. (7 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Military Finances Personal Money Management For Service Members Veterans And Their Families

Authors: Cheryl Lawhorne-Scott, Don Philpott

1st Edition

144222214X, 978-1442222144

More Books

Students also viewed these Finance questions

Question

a. Describe the encounter. What made it intercultural?

Answered: 1 week ago