You are advising company ABC on its merger and acquisition case. The buyer company offers ABC two options. Option #1 is $100 million cash at the acquisition date. Option #2 is $50 million cash on the acquisition date and 2 additional payments of $50 million each after the first year and the second year.
You are advising company ABC on its merger and acquisition case. The buyer company offers ABC two options. Option #1 is $100 million cash at the acquisition date. Option #2 is $50 million cash on the acquisition date and 2 additional payments of $50 million each after the first year and the second year.
a) The management team of ABC perceives a 20 percent annual discount rate. Which option should ABC choose? Show your work.
b) After reading the offering letter carefully, ABC’s legal team found an additional clause from the buyer. It says that the 2 additional payments of $50 million are conditional on market performance. ABC’s management team accesses the market condition is 50-50 chance. Which option should ABC choose instead? Show your work.
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