Question

Your company has earnings per share of

$5.

It has

1

million shares outstanding, each of which has a price of

$39.

You are thinking of buying TargetCo, which has earnings of

$2

per share,

1

million shares outstanding, and a price per share of

$21.

You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offered an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a

16%

premium to buy TargetCo. However, the actual premium that your company will pay for TargetCo when it completes the transaction will not be

16%,

because on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for TargetCo without any synergies. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover (ignore time value of money).

a. What is the price per share of the combined corporation immediately after the merger is completed?

b. What is the price of your company immediately after the announcement?

c. What is the price of TargetCo immediately after the announcement?

d. What is the actual premium your company will pay?

a. The price per share of the combined corporation immediately after the merger is completed will be

$nothing.

(Round to the nearest cent.)

Answer #1

given premium = 16%

target company price = 21

so premium = 21*16% = 3.36

so price offered = 21 + 3.36 = 24.36

exchange ratio = offer price / current price

=24.36 / 39

= 0.6246

Total number of shares after buying = 1 + 0.6246 = 1.6246

a)

Price = (target company price + current price) / total nuber of shares

= (39+21) / 1.6246

= **36.93**

b)

it is exactly same as calculated above = **36.93**

c)

Price of target company = Price after aquisition * exchange ratio

= 36.93*0.6246

= **23.07**

d)

Actual premium = (Price of target company after aquisition - price before aquisition) / Price before aquisition

= (23.07 - 21) / 21

= **9.85%**

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It has
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You are thinking of buying TargetCo, which has earnings of
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You will pay for TargetCo by issuing new shares. There are no
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