Question: Example:

Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $44. You are thinking of buying TargetCo, which has earnings per share of $3,1 million shares outstanding, and a price per share of $29. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offer an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 24% premium to buy TargetCo. Assume that on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for TargetCo. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover. a. What is the price per share of the combined corporation immediately after the merger is completed? b. What is the price of your company immediately after the announcement? c. What is the price of TargetCo immediately after the announcement? d. What is the actual premium your company will pay? a. What is the price per share of the combined corporation immediately after the merger is completed? A 15% premium means that you will have to pay $34.50 per share ($301.15) to buy TargetCo. Thus, you will have to issue 0.767 of your shares ($34.50/$45) per share of TargetCo, or a total of 767,000 new shares. Since 0.767 million new shares will be issued, the share price will be: Price =NumberofsharesEnterprisevalue Price =1millionshares+0.767millionshares$45pershare1millionshares+$30pershare1millionshares=$42.44 per share b. What is the price of your company immediately after the announcement? Same as the price after the merger $42.44 per share. c. What is the price of TargetCo immediately after the announcement? Since TargetCo shareholders will receive $32.55 million ( 0.767 million shares $42.44 per share), and there are 1 million shares outstanding, so the share price will be $32.55. d. What is the actual premium your company will pay? The premium will be: Premium=CurrentpricepersharePricepersharepaid1 Premium =$30pershare$32.55pershare1=0.085=8.5%