Question

2. Consider the following scenario. This is not factual. This is a scenario. American Airlines is considering purchasing Sun Country Airlines. Sun Country has indicated they are willing to sell the organization for a discounted premium amount. After months of discussion, the discounted premium amount has ranged from eight to twenty-two percent. Two weeks ago, American Airlines agreed to purchase Sun Country Airlines for the discounted premium amount of eighteen percent. Currently, Sun Country Airline’s stock price is $12, and they have 12,000,000 shares of outstanding stock.

Based on the data provided, what is the amount American will buy Sun Country for? Show the

calculations,

Answer 1

American will buy Sun Country for 18% discount than its market value. American will pay Sun Country 18% less amount of its market value.

amount American will pay = market value of Sun Country*(1-discounted premium)

market value of Sun Country = no. of shares outstanding*market price per share

market value of Sun Country = 12,000,000*$12 = $144,000,000

amount American will pay = $144,000,000*(1-0.18) = $144,000,000*0.82 = $118,080,000

the amount American will buy Sun Country for is $118,080,000.