Question

ABC has 1.00 million shares? outstanding, each of which has a price of $16. It has made a takeover offer of XYZ? Corporation, which has 1.00 million shares? outstanding, and a price per share of $2.73. Assume that the takeover will occur with certainty and all market participants know this.? Furthermore, there are no synergies to merging the two firms.

a. Assume ABC made a cash offer to purchase XYZ for $3.48 million. What happens to the price of ABC and XYZ on the? announcement? What premium over the current market price does this offer? represent?

b. Assume ABC makes a stock offer with an exchange ratio of 0.17. What happens to the price of ABC and XYZ this? time? What premium over the current market price does this offer? represent?

c. At current market? prices, both offers are offers to purchase XYZ for $3.48 million. Does that mean that your answers to parts (a?) and (b?) must be? identical? Explain

a. After ABC makes a cash offer to purchase XYZ for $3.48 million, the price of XYZ is $____per share. ? (Round to the nearest? cent.) This represents a premium of ___?%. (Round to one decimal? place.)The price of ABC is $____per share. ?(Round to the nearest? cent.)

b. After ABC makes a stock offer with an exchange ratio of 0.17?, the price of ABC is $______per share. (Round to the nearest? cent.)The price of XYZ is $_____ per share. ?(Round to the nearest? cent.)This represents a premium of ____?%. (Round to one decimal? place.)

c. At current market? prices, both offers are offers to purchase XYZ for $3.48 million. Does that mean that your answers to parts (a?) and (b?) must be? identical? Explain. ?(Select from the? drop-down menus.)

(No/Yes), the premium in the stock offer is (higher/lower) because market prices change to reflect the fact that ABC shareholders are giving XYZ shareholders money because they are paying a premium.? Thus, on the announcement XYZ stock goes down/up and ABC stock goes (up/down), which (increases/reduces) the premium relative to the cash offer.

Answer 1

ABC has valued XYZ at $3.48 million while XYZ has 1 million shares outstanding, implying that the stock has been valued at $3.48 per share. The current market price of XYZ stock is $2.73. The premium therefore is $0.75 ($3.48 - $2.73). It shows that the markets had underpriced XYZ shares. It also shows that ABC has found hidden potential in XYZ, which is the market did not cover. The price of XYZ in the stock market will increase on the announcement. The increase is expected to reach up to $2.73 price range, which is the price offer.