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. |
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2. |
include some discount relative to the current market value of the target's equity. |
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3. |
be the book value of the target's equity. |
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4. |
be the market value of the target's equity. |
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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