Question

What price must a company typically pay to buy another company? The price will: 1. include...

What price must a company typically pay to buy another company? The price will:

1.

include some premium over the current market value of the target's equity.
2.

include some discount relative to the current market value of the target's equity.
3.

be the book value of the target's equity.
4.

be the market value of the target's equity.
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Answer #1

The answer is the 1st option i.e. include some premium over the current market value of the target's equity.

Explanation: When buying another company the buyer usually has to a pay a premium over the current market value. This is because the buyer will have to pay a premium over the current market capitalization to ensure that the buy-out is attractive for the shareholders. Shareholders will not approve of a deal in case a discount is being offered relative to the market value of the target company.

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