Hyundai Motor Company, an automobile manufacturer, is considering the acquisition of Cooper Tire, a firm that manufactures automobile tires. Hyundai has estimated a potential annual gain in operating cash flows from the acquisition to be $400,000 per annum. Hyundai currently has 4 million shares on issue at a market price of $3.00 per share, whilst Cooper Tire has 2 million shares listed at a market price of $2.50 per share. The management of Hyundai is considering making an offer to Cooper Tire shareholders of either $3.00 per shareoralternatively one share in Hyundai for every one Cooper Tire share that Cooper Tire shareholders currently hold. Assume that the appropriate discount rate is 10% p.a. and ignore other factors that are not stated here.

Based on the information above, answer the following questions

(a)-(e). You need toshow all your workings along with the final answers.

Q.

(a) What is the type of this takeover plan based on the industries ofHyundaiand Cooper Tire?Suggest any specific sources of the potential takeover gains in this particular takeover plan.

(b)Assuming thatoperating cash flowsoccur at yearend, what is

thetakeovergain in present value terms that would be created if the

acquisition were to proceed immediately?

(c)Provide advice to management as to the difference, if any, the two proposals may have

on the wealth of existing Hyundai shareholders.

(d)What is the maximum price per share that Hyundai could offer Cooper Tire

shareholders in acashbid?

(e) Suppose that the share offer is (re)structured such that the expected gain is

split equallyboth in a cash offer and in a share offer. Why might the

bidding firm's shareholders prefer to offer shares rather than cash? Why might

the target firm's shareholders prefer to receive shares rather than cash?