Question $$1$

Acquirco, Inc. announced aftermarket yesterday that it will be acquiring Targetco, Inc. in a $3-$for$-2$ offering to Targetco Share holders.

$($For every two shares of Targetco owned, investors will receive three shares of Acquirco if the deal closes$).$

As a savy portfolio manager, you sense a convertible arbitrage opportunity and are looking to invest in a convertible arbitrage position.

a$.$ On a long investment of $$1,000,000,$ which company would you buy and which company yould you short to create a convertible arbitrage trade?

If you entered your positions at market open, what would be your position value in each stock? $[2$pt$]$

b$.$ What is the return on your investment if the deal closes and your short borroving cost is $35bp$ and short interest rebate is $15$bps over the holding period? $(2$pt$)$

ieturn on Investmer:

c$.$ If you believe that there is $80\%$ probability of the deal finalizing, is this a trade vorth doing? Why? $(1$pt$)$

d$.$ What is the expectation value of this trade if you believe the deal has a $90\%$ probability of closing? $(2$pt$)$

Expectation Value:

e$.$ What must the probability be of this deal to close successfully for you to breakeven on your money? Is this more or less

than the average deal closure probability discussed in class? $(2$pt$)$

f$.$ Would you enter into this position? Why or why not? $[1$pt$]$

g$.$ Repeat the analysis, but now with full leverage. If your broker had an initial margin of $50\%$ requirement and you vanted to fully leverage your position, what

is the maximum number of shares you can longlshort each company to initiate your position and maximize your return? $(2$pt$)$

h$.$ Assuming you maximize leverage as in part g$,$ what is your return on investment if the deal closes and your borrov ing cost is $35bp$

$($for shorts and loans$)$ and your short interest rebate is $15$bps for the holding period of your position? $(2$pt$)$

Return on Investment

What is the downside return of your leveraged investment if the deal unwinds? $(2$pt$)$

Above what probability must this deal be so that your leveraged investment is positive? $(2$pt$)$