Question 5 Large Inc. has a current share price of $49. It has 3,550,000 shares outstanding and is planning to acquire Small Inc. Small Inc. has 1,100,000 shares outstanding and its shares are currently traded at $16. Managers in Large Inc. believe that merging the two companies will result in a $34 million synergy. The takeover will occur with certainty and all market participants know this. (a) Large initially proposes to make a cash offer of $22 million to purchase Small, what will the share prices of both Large and Small be at the announcement? What premium over the current market value of Small does this offer represent? (6 marks) (b) Alternatively, suppose that Large announces a stock offer. It offers 421,400 newly issued shares to acquire all of the shares in Small. i. What percentage of the merged company will be held by Small shareholders after the transaction? (4 marks) ii. What is the share price of the new entity after the merger? (5 marks) iii. How much value do existing Small shareholders extract from this transaction? (3 marks) iv. What premium over the current market value do Small's shareholders receive? (2 marks) (Total = 20 marks) (