Question 6 You work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel (AS). AS's stock price is $15 and it has 10 million shares outstanding. You believe that if you gain control of the company i.e. acquire 50% of the outstanding shares) and replace its management, its value will increase by 50%. You are planning on doing a leveraged buyout of AS (issuing debt to buy shares in the target), and will offer $20 per share to acquire control of the company. 1. What is the value of AS before the acquisition attempt? 2. How much do you need to borrow in order to fund the LBO (assume the market valuation fully reflects the value increase generated by the acquisition)? 3. Now, assume that you gain control of AS. What is the price of the non-tendered shares? 4. Do you think that AS's shareholders will tender their shares? Formally explain your argument, relating it to the Grossman-Hart free-rider problem in takeovers. 5. Assuming you get 50% control of AS, what is the value of your stake after the transaction is completed? 36 marks