Consider the following premerger information about a bidding
firm (Firm B) and a target firm (Firm T). Assume that both firms
have no debt outstanding.
Firm B | Firm T | |||||
Shares outstanding | 5,000 | 1,600 | ||||
Price per share | $ | 51 | $ | 20 | ||
At what exchange ratio of B shares to T shares would the
shareholders in T be indifferent between the two offers?
Basically if Firm B only gives the current value of the shares to Firm T then the shareholders will be indifferent.
Now if we divide this by 51 we will get the number of shares of Firm B required to equate this share value:
So for 1600 shares of Firm T if Firm B gives 628 shares then the shareholders will be indifferent as they wont make any profit nor will the make any loss. So the exchange ratio is 1600/628 = 2.55 which mean that one share of firm T is equal to 2.55 shares of firm B
Get Answers For Free
Most questions answered within 1 hours.