You read the following news in the financial media:

NEW YORK (CNN/Money), Friday, January 28, 2005 - Procter & Gamble announced the largest acquisition in its history Friday, agreeing to buy Gillette in a $57 billion deal that combines some of the world's top brands and could lead to further mergers involving products consumers know and love. "It's a dream deal," Buffett said, adding that he would increase his holdings so that he would end up with 100 million shares of P&G by the time the deal closes. (The deal gives Buffett a one-day profit, on paper, of roughly $645 million and a whopping $4.4 billion profit since acquisition.) Under the deal announced early Friday, Procter & Gamble will pay 0.975 share of its common stock for each share of Gillette common stock. Based on Thursday closing prices, that would represent an 18 percent premium for Gillette shares. The news sent P&G stock down about 2 percent while Gillette jumped about 12 percent in afternoon trading.

A historical prices search on Yahoo! Finance gives you the following (end-of-day) stock prices for the two companies:

Date P&G Gillette

26 Jan 2005 54.33 44.56

27 Jan 2005 54.22 45.40

28 Jan 2005 53.07 51.28

31 Jan 2005 52.17 50.40

1 Feb 2005 51.84 49.99

2 Feb 2005 52.34 50.38

Also, what is not reported in the news is that on the merger announcement date (Fri, Jan 28), Gillette also paid a dividend of $0.16 per share.

(a) What is the return on P&G and Gillette on the announcement day? (Do not forget to include the dividend.)

(b) Suppose markets are efficient. If Gillette had not paid its dividend on 28Jan05, what do you think its closing price would have been at the end of that day?

(c) According to the news, using Thursday closing prices, P&G offered Gillette 0.975$54.22 = $52.86 per share, which represents a premium of (52.8645.40)/45.40 =16.44%. (Notice the slight difference from the reported figure of 18%.) However, instead of the price of Gillette jumping all the way to the offer price of $52.86, it only jumped to $51.44 (including the dividend). Assuming markets are efficient, what likelihood did the market place on the fact that the merger between P&G and Gillette will be successful? Give a number for that probability. What are the assumptions that you use to compute this likelihood?