Question
Suppose that a merger is announced. The targets stock price immediately prior to the announcement is 10. The expected premium to be paid on target
Suppose that a merger is announced. The targets stock price immediately prior to the announcement is 10. The expected premium to be paid on target shares is 20%. The market expects that the deal will go through with a probability of 50%, and that payment will happen in cash. What will happen to the stock price of the target immediately after the announcement, provided that stock markets are semi-strong form efficient?
A) It will remain at 10 because there is no absolute certainty that the merger will take place
B) It will rise to 11
C) It will rise to 12
D) It will drop heavily due to the short selling actions of merger arbitrageurs
E) None of the above
Please explain your answer.
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