Question #1 Acquirco, Inc. announced aftermarket yesterday that it will be acquiring Targetco, Inc. in a 3-for-2 offering to Targetco Shareholders. (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. Targetco Acquireco Today's Yesterday's Open $71.85 $48.50 Close $63.50 0.6667 Price of Acquiror $49.96 Intrinsic Target Valu $105.15 Profit From Target ##### Profit From Acquiror a. On a long investment of $1,000,000, which company would you buy and which company would 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? (2pt] Targetco Acquireco Long/Shor Shares Position Value Long short 13,918 $ 1,000,000 450,012 1E+06 b. What is the return on your investment if the deal closes and your short borrowing cost is 35bps and short interest rebate is 15bps over the holding period? (2pt) leturn on Investmer c. If you believe that there is 80% probability of the deal finalizing, is this a trade worth doing? Why? [1pt) d. What is the expectation value of this trade if you believe the deal has a 90% probability of closing? [2pt) 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? (2pt) f. Would you enter into this position? Why or why not? (1pt) g. Repeat the analysis, but now with full leverage. If your broker had an initial margin of 50% requirement and you wanted to fully leverage your position, what is the maximum number of shares you can long/short each company to initiate your position and maximize your return? (2pt) Long/Shor Shares Position Value Targetco Acquireco h. Assuming you maximize leverage as in part g, what is your return on investment if the deal closes and your borrowing cost is 35bps (for shorts and loans) and your short interest rebate is 15bps for the holding period of your position? (2pt] leturn on Investmer