Question 4 Jet plc and Brecon plc belong to the same industry. Both firms are entirely equity financed. Table 1 shows relevant information for the two firms. Acquisition costs are zero, and the market is semi-strong form efficient. (a) What are the share prices and market values of Jet and Brecon before the acquisition is announced? (5 marks) (b) If Jet acquires Brecon by issuing one new share in exchange for every two shares of Brecon, what is the expected post-acquisition share price? Consider an investor with 100 shares in each firm before the acquisition. How much will the investor's wealth change after the acquisition? (5 marks) (c) Alternatively, Jet can make a cash offer of 1.50 for each Brecon share (Jet has the cash necessary to make this offer). What is the post-acquisition share price of Jet? What is the gain or loss per share for Brecon shareholders? (5 marks) (d) Assume Jet announces that it has agreed to acquire the entire 30 million shares of Brecon at a price of 1.50 in cash per Brecon share. Following the announcement, the share price of Jet changes immediately to 3.00. What is the market's valuation of the synergy gain of the acquisition? (5 marks) (e) Why might a target firm's price/earnings ratio be inappropriate for valuing the target firm in an acquisition? (5 marks) (Total =25 marks)