The unlevered firm Emin plans to acquire another unlevered firm Trio in the same industry. Emin: share price = $4.50; Shares outstanding = 28M; Payout ratio = 65% Trio: share price = $1.90; Shares outstanding = 10.5M; Payout ratio = 20% The deal will result in expected cost savings for the post-acquisition firm with a total PV of $38 mio. (a) How many new shares would Emin issue to Trios shareholders in exchange for the whole 10.5 million of Trios

shares? What is the total value and price per share of the merged firm? Should Emin pay for the acquisition? Why or why not?

Assume now that Trios shareholders will agree to the acquisition for a premium of $4.05m.

(b) What is the minimum number of shares Emin should offer, such that Trios shareholders will participate in the acquisition?

(c) Assume Emin decides to acquire Trio by issuing the minimum number of shares as in part (b). In the first year the total income of the merged firm will be $15.87 million. Emins payout ratio will be saved in the merged company. What change in dividend payment will a former Trio shareholder get in the first year of the merged firm, if they had 1000 shares in Trio before the deal?

(d) What does clientele theory predict about the relationship between a firms value and a change in its dividend policy? Does this theory have any implications for the success of the acquisition? Explain. (150 words)