Question

BAD? Company's stock price is $40?, and it has 6.0 million shares outstanding. You believe that if you buy the company and replace its? management, its value will increase by 34%. Assume that BAD has a poison pill with a 15% trigger. If? triggered, all target shareholderslong dash—other than the acquirerlong dash—will be able to buy one new share in BAD for each share they own at a 60% discount. Assume that the price remains at $40 while you are acquiring your shares. If? BAD's management decides to resist your buyout? attempt, and you cross the 15 %15% threshold of? ownership: a. How many new shares will be issued and at what? price? b. What will happen to your percentage ownership of? BAD? c. What will happen to the price of your shares of? BAD? d. Do you lose or gain from triggering the poison? pill? If you? lose, where does the loss go? (who benefits)? If you? gain, where does the gain come from? (who loses)?

a. How many new shares will be issued and at what? price? Number of new shares issued is ___________. ?(Round to the nearest? integer.) The shares will be issued at ?$__________ per share.???(Round to the nearest? cent.)

b. What will happen to your percentage ownership of BAD? Co.? The percentage ownership will be _________%. ?(Round to two decimal? places.)

c. What will happen to the price of your shares of BAD? Co.? The new stock price will be ?$__________. ?(Round to two decimal? places.)

d. Do you lose or gain from triggering the poison? pill? The gain? (loss) is ?$_________. ?(Round to the nearest? dollar, positive if? gain, negative if? loss, zero if? neither.) If you? lose, where does the loss go? (who benefits)? If you? gain, where does the gain come from? (who loses)? Every other shareholder in the target firm gains ?$_________ per share.???(Round to the nearest? cent.)

Answer 1

a) In this case, the 15% threshold is breached that is poison pill is triggered.

Shares bought by us 15% of 6,000,000 = 900,000 shares

Remaining shares outstanding 6,000,000-900,000= 5,100,000 which is the total no. of new shares issued

These shares will be issued at 50% * $40 = $20

b) Our percentage ownership in BAD will be reduced from 15% (trigger point) to 8.11% (900,000/6m+5.1m)

c) The price of our holding will reduce from $40 per share to $21.62 ($40*6M/11.1M)

d) We will lose when poison pill is triggered, the loss is -$16,540,541 (40-21.62*900,000)

Our loss is the gain of other shareholders, they will gain $3.24 per share held by them ($16,540,541/5.1M)