Question

A regional restaurant chain, Club Finance Rocks (CFR), is considering purchasing a smaller chain, AccountingIsOkToo Sandwiches (AIOT). Based on the post-merger data for the AIOT, the unlevered value of operations is $150 million and the value of the tax shields is $80 million. AIOT has $50 million of debt and $60 million of non-operating assets. Current stock price of the AIOT is $16 per share, with 12 million shares outstanding.

Question: Among the choices below, which offer price falls into the range of prices that the target and the acquirer may consider AND will give the MOST of the merger premium to the Acquirer?

		$15
		$17
		$18
		$19
		$21

Answer 1

Price per Share of AIOT based on Value of Company
= Value of Company / No of Shares outstanding
Where,
Value of Company
= Value of operations + Value of Tax Shields
- Debt +Non Operating Assets
= $150 million + $80 million - $50 million + $60 million
= $240 million
Price per Share of AIOT based on Value of Company
= Value of Company / No of Shares outstanding
= $240 million / 12 million
= $20
Now, Current Price per Share of AIOT is $16.
So,
Offer Price
= (Price per Share based on Value of Company + Current Price per Share) / 2
= ($20 + $16) / 2
= $36 / 2
= $18
Offer Price will be $18.