Firm B plans to acquire firm T. Both firms have no debt. B believes the acquisition will increase its total after-tax annual cash flow by $1.6 million for the next three years and then it decreases to 1.2 million, indefinitely. The appropriate discount rate for the incremental cash flows is 12%.

The pre-merger information about firm B and target firm T is:

FirmB

FirmT

Shares outstanding

450,000

240,000

Price per share

$62

$45

FirmBgives two offers to FirmT. First, FirmBoffers $48 per share in cash. Second, it offers three of its shares for every five ofT's shares.

1. What is the synergy from acquiring firm T?

2. What is the bidder premium for cash offer?

3. Which offer will the target firm accept?

4. At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers?