“Shares of each of America Online and Time Warner common stock are traded on the New York Stock Exchange. On January 7, 2000, the last trading day before the public announcement of the merger, America Online common stock closed at $72.88 per share and Time Warner common stock closed at $64.75 per share. Based on the Time Warner common stock exchange ratio, 1.5, the pro forma equivalent per share value of the Time Warner common stock on January 7, 2000 was equal to approximately $109.32 per share. On May 15, 2000, America Online common stock closed at $58.50 per share and Time Warner common stock closed at $86.06 per share. The pro forma equivalent per share value of the Time Warner common stock on May 15, 2000 was approximately $87.75 per share.” Questions: Using the above information, explain using calculations the $109.32 “pro forma” equivalent per share value of the Time Warner common stock on January 7, 2000. Explain (by calculations) the $87.75 per share price. Use the following information to compute the market caps of T-W and AOL as of January 7, 2000. Assuming zero synergies, what common stock price do you forecast for TW-AOL? How much value per share does a TW shareholder expect to receive? How much value does an AOL shareholder expect to receive? TW $_ AOL $_

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter10: Stockholder's Equity

Section: Chapter Questions

Problem 57E: Outstanding Stock Lars Corporation shows the following information in the stockholders equity...

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“Shares of each of America Online and Time Warner common stock are traded on the New York Stock Exchange. On January 7, 2000, the last trading day before the public announcement of the merger, America Online common stock closed at $72.88 per share and Time Warner common stock closed at $64.75 per share. Based on the Time Warner common stock exchange ratio, 1.5, the pro forma equivalent per share value of the Time Warner common stock on January 7, 2000 was equal to approximately $109.32 per share. On May 15, 2000, America Online common stock closed at $58.50 per share and Time Warner common stock closed at $86.06 per share. The pro forma equivalent per share value of the Time Warner common stock on May 15, 2000 was approximately $87.75 per share.” Questions: Using the above information, explain using calculations the $109.32 “pro forma” equivalent per share value of the Time Warner common stock on January 7, 2000. Explain (by calculations) the $87.75 per share price. Use the following information to compute the market caps of T-W and AOL as of January 7, 2000. Assuming zero synergies, what common stock price do you forecast for TW-AOL? How much value per share does a TW shareholder expect to receive? How much value does an AOL shareholder expect to receive? TW $_____ AOL $_____

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