Just before a takeover announcement, Firm A has the market value of $500 million with 25 million shares outstanding, and earnings per share of $10. Firm T has the market value of $100 million with 10 million shares outstanding, and its earnings per share of $5. Both are equity-financed firms. A has just announced that it will acquire T. A estimates that acquiring T will help it increase its earnings with the net present value of $70 million.

(i) Assume A will pay for T with a cash payment of $150 million. Estimate the takeover premium, the net present value (NPV) of the takeover to A.

(ii) Assume A will pay for T using a stock payment with an exchange ratio of 0.75. Estimate the market values and the stock prices of both A and Y immediately after the takeover announcement.

(iii) Assume A will pay for T using a stock payment, what is the maximum exchange ratio that can guarantee that the takeover is a positive NPV investment for A?

(iv) Explain which payment method, a cash payment of $150 million or stock payment with an exchange ratio of 0.75, will lead to a higher earnings per share for A after the takeover?

(v) Explain the governance role of shareholders in a takeover