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 50

Lata 20

Viru 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 5

Lata 20

Viru 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.