Section B Solue ONE of the following problems: Question 5 Alto has earnings per share of $4. It has 10 million shares outstanding and is trading at $80 per share. Alto is considering buying a target company named Tall Inc.. Tall Inc. has earnings per share of $2, trades at a price per share of $20, and has 3 million shares outstanding. Alto will pay for Tall by issuing new shares (a stock swap). There are no expected synergies from the transaction. Alto offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 10% premium to buy all. Assume that once announced, the acquisition will occur with certainty, and all market participants know this on the announcement day. Financial markets are perfect. a. (4 marks) What is the exchange ratio offered in the stock swap? b. (10 marks) What will earnings per share be after the merger? Compute the price per share of the combined corporation after the merger. Is the acquisition a positive Net Present Value investment for Alto's shareholders? Comment c. (7 marks) What is the price per share of Tall immediately after the announcement? What is the actual premium that Alto will pay for Tall? Comment. d. (7 marks) What is the minimum level of synergies S' that would make this deal beneficial for Alto shareholders? If synergies were equal to S', what would the actual premium paid to Tall shareholders be? What level of synergies would instead ensure that Tall Inc.'s shareholders get an actual premium equal to 20 percent? 28 marks