The CEOs of companies Qwerty plc and School boys decide to merge. The new company will be called Qwerty School Plc: each share of Qwerty Plc will be exchanged for 3 shares of Qwerty School Plc; while each share of School boys will be exchanged for 1 share of Qwerty School Plc. There are currently 1 million shares in Qwerty Plc and 2 million shares in School boys. The current price of one share of Qwerty Plc is 50. School boys is not traded.

a) Assuming that a good estimate of the value of the equity in Qwerty School Plc after the merger is 80m, what is the value of the offer for the shareholders of School boys? Should shareholders of Qwerty Plc accept the deal?

b) Assuming instead that (i) the market capitalization of Qwerty Plc before the deal corresponds to the true market valuation of Qwerty Plc, (ii) the expected synergies from the deal are equal to 10m and (iii) no premium is paid to School boys, what is the market capitalisation of School boys as a standalone implicit in the exchange ratios being offered?

c) Suppose that assumptions are as in case (a) and, before the deal is announced, School boys is listed in the stock exchange. The share price of School boys before the announcement is 25. How should the exchange ratio for School boys change to make its shareholders indifferent between accepting and rejecting the deal (assume as before that Qwerty Plc shareholders still receive 3 shares in Qwerty School for each share they own)? What led to that change in the exchange ratio compared to part (a)?

d) Under the same assumptions as in part (c), suppose that the exchange ratios stay as initially announced: Qwerty Plc shareholders get 3 shares for each share they own; School boys shareholders get 1 share for each they own. How much cash should Tar boys s shareholders receive to make them happy to accept the deal? Is this a good deal for Qwerty Plc shareholders?