Your company has earnings per share of
million shares outstanding, each of which has a price of
You are thinking of buying TargetCo, which has earnings of
million shares outstanding, and a price per share of
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
premium to buy TargetCo. However, the actual premium that your company will pay for TargetCo when it completes the transaction will not be
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
(Round to the nearest cent.)
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
Total number of shares after buying = 1 + 0.6246 = 1.6246
Price = (target company price + current price) / total nuber of shares
= (39+21) / 1.6246
it is exactly same as calculated above = 36.93
Price of target company = Price after aquisition * exchange ratio
Actual premium = (Price of target company after aquisition - price before aquisition) / Price before aquisition
= (23.07 - 21) / 21
(please give thumbs up if it's helpful)
Get Answers For Free
Most questions answered within 1 hours.