1. Firm A decided to acquire Firm B. Firm A currently has 2,000 shares outstanding. The current market capitalization of Firm A is $20,000, while the market capitalization of Firm B is $24,000. Firm A has valued Firm B at $28,000 after the merger. Firm A is considering a cash or a stock offer. Under the cash offer Firm A will pay $26,000 to Firm B's shareholders. Under the stock offer Firm B's shareholders will receive 500 newly issued shares in the new, merged company. Which of the two alternatives is the more attractive offer for Firm A's shareholders? (5 marks)
2. In a takeover, a cash offer is basically the same thing as a share exchange. Do you agree? Why or why not? (3 marks)