Question

. Light Years Savings Association has just received an offer to merge from Courthouse County Bank. Light Years’ stock is currently selling for $70 per share. The shareholders of Courthouse County agree to pay Light Years’ stockholders a bonus of $10 per share.

a. What is the merger premium in this case?

b. If Courthouse County's shares are currently trading for $85 per share, what is the exchange ratio between the equity shares of the two institutions?

c. Suppose that Light Years has 20,000 shares and Courthouse County has 30,000 shares outstanding. How many shares in the merged firm will Light Years’ shareholders wind up with after the merger?

d. How many total shares will the merged bank have outstanding?

Answer 1

a). Merger Premium =[(Current Price + Bonus) / Current Price ] x 100

   =[($70 + $10) / $70] x 100 = 114.29%

b). Exchange Ratio = (Current Price_{light years} + Bonus_lightyears) / Current Price_{Courthouse County}

= [($70 + $10) / $85] = $80 / $85 = 0.9412 to 1

c). If Light Years has 20,000 shares outstanding and Courthouse County has 30,000 shares, Light Years' shareholders will receive 0.94 x 20,000 or 18,824 shares in the consolidated banking company.

d). Merged Bank's Total Shares = Light Years' new shares + Courthouse County Shares

= $18,824 + $30,000 = $48,824