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QUESTION 1 Aussie Ltd is thinking of acquiring Kiwi Ltd. The current market value of Aussie Ltd is $20 million, whereas Kiwis market value is
QUESTION 1
Aussie Ltd is thinking of acquiring Kiwi Ltd. The current market value of Aussie Ltd is $20 million, whereas Kiwis market value is $10 million. Each firm has no debt and 2 million shares outstanding. Aussie estimates that by combining the two companies, it will reduce selling and administrative costs by $150,000 per annum in perpetuity with no change in risk.
Aussie is considering a cash offer of $5.50 per share for Kiwi or a share swap of one Aussie share for two Kiwi shares.
- If the cash offer is made, how much of the gain goes to the shareholders of Kiwi Ltd and how much goes to the shareholders of Aussie Ltd?
- If Aussie Ltd offers the share swap, what will be the new share price of the combined firm?
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