Question II The three founders of Zig Pharma gathered around the table to discuss their response to a takeover offer that they had just received. After the company went public each of them had sold some shares off 1 and on to finance their liquidity needs with the result that their holdings in millions of shares) were currently as follows: Raj Lata Viru 50 20 35 Moreover, at a time of liquidity shortage at Zig a few years ago, the founders had lent money to the company in the form of a bond paying a concessional coupon of 2.0%. These bonds mature 11 years from now, and comparable bonds trade at an yield of 7.0% (the coupons are paid in semi-annual instalments and the yield is semi-annually compounded). The holdings of these founders in these bonds are as follows in millions of bonds of face value of 100) Raj Lata Viru 5 20 10 The acquirer is offering to buy all the shares of the company at a price of 90 per share as compared to the current market price of 75. The acquirer would like the company to be debt free and proposes to redeem all the bonds at par immediately. All the founders have an emotional attachment to the company, but they could not ignore their financial interests completely. Who among them has the strongest financial interest to accept the takeover offer? Who has the weakest financial interest? Show all workings including the valuation of the shares and bonds before and after the offer. Question II The three founders of Zig Pharma gathered around the table to discuss their response to a takeover offer that they had just received. After the company went public each of them had sold some shares off 1 and on to finance their liquidity needs with the result that their holdings in millions of shares) were currently as follows: Raj Lata Viru 50 20 35 Moreover, at a time of liquidity shortage at Zig a few years ago, the founders had lent money to the company in the form of a bond paying a concessional coupon of 2.0%. These bonds mature 11 years from now, and comparable bonds trade at an yield of 7.0% (the coupons are paid in semi-annual instalments and the yield is semi-annually compounded). The holdings of these founders in these bonds are as follows in millions of bonds of face value of 100) Raj Lata Viru 5 20 10 The acquirer is offering to buy all the shares of the company at a price of 90 per share as compared to the current market price of 75. The acquirer would like the company to be debt free and proposes to redeem all the bonds at par immediately. All the founders have an emotional attachment to the company, but they could not ignore their financial interests completely. Who among them has the strongest financial interest to accept the takeover offer? Who has the weakest financial interest? Show all workings including the valuation of the shares and bonds before and after the offer
