Question

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?

Answer 1

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}