Kindle Corp. has announced an offer to acquire Readers Inc. The offer specifies that Kindle will exchange 1.1 shares of its own stock and $5.00 cash for each share of Readers. Estimated synergies are $8M. The following data are available.

Kindle Readers Combined

EPS $2.00 $3.20

Common shares 8 M 3 M

Pre-announcement stock price $4.00 $8.00

Net Income

Market Capitalization

1. Under the terms of the offer, what synergies must be realized for Kindle to break even?

2. Fill in the table. What is the expected share price of the combined firm?

3. What is the total price paid to Readers shareholders?

4. What price is Kindle effectively offering for one share of Readers stock? What percent premium is Kindle offering for Readers shares?

5. What are the gains (losses) to each group of shareholders?

6. What fraction of expected synergies does each group capture?

7. Based on the combined EPS, is the merger accretive or dilutive to the acquirers EPS?

8. After the announcement was made, Readers stock price rose to $9.16. Find the arbitrage spread.

9. What is the markets forecast probability that the merger will be completed?