Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 28, Problem 15P
ABC has 1 million shares outstanding, each of which has a price of $20. It has made a takeover offer of XYZ Corporation, which has 1 million shares outstanding and a price per share of $2.50. Assume that the takeover will occur with certainty and all market participants know this. Furthermore, there are no synergies to merging the two firms.
- a. Assume ABC made a cash offer to purchase XYZ for $3 million. What happens to the price of ABC and XYZ on the announcement? What premium over the current market price does this offer represent?
- b. Assume ABC makes a stock offer with an exchange ratio of 0.15. What happens to the price of ABC and XYZ this time? What premium over the current market price does this offer represent?
- c. At current market prices, both offers are offers to purchase XYZ for $3 million. Does that mean that your answers to parts (a) and (b) must be identical? Explain.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
ABC has 1.00 million shares outstanding, each of which has a price of $17. It has made a takeover offer of
XYZ Corporation, which has 1.00 million shares outstanding, and a price per share of $2.52. Assume that the takeover
will occur with certainty and all market participants know this. Furthermore, there are no synergies to merging the two
firms.
a. Assume ABC made a cash offer to purchase XYZ for $3.41 million. What happens to the price of ABC and XYZ on
the announcement? What premium over the current market price does this offer represent?
b. Assume ABC makes a stock offer with an exchange ratio of 0.14. What happens to the price of ABC and XYZ
this time? What premium over the current market price does this offer represent?
c. At current market prices, both offers are offers to purchase XYZ for $3.41 million. Does that mean that your answers
to parts (a) and (b) must be identical? Explain.
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
6,400
1,600
Price per share
$
48
$
19
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $8,900.
a.
If Firm T is willing to be acquired for $21 per share in cash, what is the NPV of the merger?
b.
What will the price per share of the merged firm be assuming the conditions in (a)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
c.
If Firm T is willing to be acquired for $21 per share in cash, what is the merger premium?
d.
Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its shares for every two of T's shares, what will the price per share of the merged firm be? (Do not round intermediate calculations and round your answer to 2…
e. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction.
If Rearden pays no premium to buy Associated Steel, then Rearden's price-earnings ratio after the merger will be closest to:
10.0.
10.42.
12.0.
7.8.
Chapter 28 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 28.1 - Prob. 1CCCh. 28.1 - Prob. 2CCCh. 28.2 - On average, what happens to the target share price...Ch. 28.2 - Prob. 2CCCh. 28.3 - What are the reasons most often cited for a...Ch. 28.3 - Prob. 2CCCh. 28.4 - Prob. 1CCCh. 28.4 - What do risk arbitrageurs do?Ch. 28.5 - Prob. 1CCCh. 28.5 - Prob. 2CC
Ch. 28.6 - Prob. 1CCCh. 28.6 - Prob. 2CCCh. 28 - What are the two primary mechanisms under which...Ch. 28 - Prob. 2PCh. 28 - What are some reasons why a horizontal merger...Ch. 28 - Prob. 4PCh. 28 - Prob. 5PCh. 28 - Prob. 6PCh. 28 - How do the carryforward and carryback provisions...Ch. 28 - Diversification is good for shareholders. So why...Ch. 28 - Your company has earnings per share of 4. It has 1...Ch. 28 - If companies in the same industry as TargetCo...Ch. 28 - Prob. 11PCh. 28 - Prob. 12PCh. 28 - Prob. 13PCh. 28 - Lets reconsider part (b) of Problem 99. The actual...Ch. 28 - ABC has 1 million shares outstanding, each of...Ch. 28 - Prob. 16PCh. 28 - How does a toehold help overcome the free rider...Ch. 28 - Prob. 18P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 3. Suppose you are the sole owner of company ABC. The market value of your company is $100 and there are 20 shares. Now you are thinking about acquiring the target company XYZ with a standing alone market value of $50 with 25 shares outstanding. The synergy of the two companies is $20. We assume the cost of the merger is zero, meaning target shareholders break even. a) Suppose you pay XYZ's shareholders in cash from your company ABC. What is the total firm value post-merger? What is the share price? b) Suppose you instead create new shares to pay XYZ's shareholders. How many shares do you need to create? How many shares do you need to pay for each share in XYZ? Instead of $20, in the remainder of the question, we assume the synergy is -$10. c) Redo part a) under the new synergy. Would you choose to acquire company XYZ? Discuss your finding in comparison with a).arrow_forwardConsider 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 Price per share 6,000 1,200 $ 47 $ 17 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,500. a. If Firm T is willing to be acquired for $19 per share in cash, what is the NPV of the merger? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What will the price per share of the merged firm be assuming the conditions in (a)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. If Firm T is willing to be acquired for $19 per share in cash, what is the merger premium? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) d. Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its shares for…arrow_forwardGobi Desserts is bidding to take over Universal Puddings. Gobi has 3,500 shares outstanding, selling at $55 per share. Universal has 2,500 shares outstanding, selling at $22.50 a share. Gobi estimates the economic gain from the merger to be $22,500. Required: If Universal can be acquired for $25 a share, what is the NPV of the merger to Gobi? What will Gobi sell for when the market learns that it plans to acquire Universal for $25 a share? (Round your answer to 2 decimal places.) What will Universal sell for? Assume that the market expects the merger to go through without any further bidding. What are the percentage gains to the shareholders of each firm? (Do not round intermediate calculations. Round your answers to 1 decimal place.) Now suppose that the merger takes place through an exchange of stock. On the basis of the premerger prices of the firms, Gobi sells for $55, so instead of paying $25 cash, Gobi issues 0.45 of its shares for every Universal share acquired. What will be…arrow_forward
- ABC Ltd own stock in a company. The current price per share is K25. Quandy Ltd has just announced that it wants to buy ABC Ltd and will pay K35 per share to acquire all the outstanding stock. ABC Ltd’s management immediately begins fighting off this hostile bid. Is management acting in the shareholders’ best interests? Why or why not?arrow_forwardConsider 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 4,600 1,000 Price per share $ 40 $ 14 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $8,800. If Firm T is willing to be acquired for $16 per share in cash, what is the NPV of the a. merger? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) What will the price per share of the merged firm be assuming the conditions in b. (a)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) If Firm T is willing to be acquired for $16 per share in cash, what is the merger c. premium? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) d. Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its shares for…arrow_forwardFirm X is going to acquire Firm Y. The acquisition will be done via a share exchange, whereby Firm X will exchange two of its shares for every one of Firm Y’s shares. Synergy is $1,500,000 in total. Firm X (Bidder) Firm Y (Target) Shares Outstanding 1,500,000 150,000 Price per Share $50 $80 Earnings 2,400,000 1,950,000 43. What is the takeover premium in dollars? (Tip: round the share price of the combined firm to two decimal places in calculating your answer.) A) $5,700,000 B) $1,500,000 C) $2,751,000 D) $2,500,000 E) $3,000,000arrow_forward
- Firm E is going to acquire Firm F. The acquisition will be done via a share exchange, whereby Firm E will exchange 2.65 of its shares for every one of Firm F's shares. Synergy is $1,250,000 in total. Firm E has 350,000 shares outstanding trading at $35 each. Firm F has 45,000 shares outstanding trading at $84 each. What would the exchange ratio have to be for the NPV of the deal to be zero? Question 1 options: A) 3.13 shares of E for every 1 of F B) 0.41 shares of E for every 1 of F C) 3.15 shares of E for every 1 of F D) 2.40 shares of E for every 1 of F E) 3.19 shares of E for every 1 of Farrow_forwardAcquiring Corp. is considering a takeover of Takeover Target Inc. Acquiring has 12 million shares outstanding, which sell for $20 each. Takeover Target has 6 million shares outstanding, which sell for $10 each. If the merger gains are estimated at $24 million, what is the highest price per share that Acquiring should be willing to pay to Takeover Target shareholders?arrow_forwardWinterbourne is considering a takeover of Monkton Incorporated. Winterbourne has 29 million shares outstanding, which sell for $78 each. Monkton has 24 million shares outstanding, which sell for $96 each. If the merger gains are estimated at $120 million, what is the highest price per share that Winterbourne should be willing to pay to Monkton shareholders? Highest price per sharearrow_forward
- A large manufacturing company has offered to purchase Composites, Inc. for$32 per share. Before the merger proposal announcement, Composites wastrading at $20/share and, after the announcement, its share price jumped up to$28/share. It is estimated that, if the merger fails to go through, the price ofComposites will drop to $15/share. a) Assuming that the risk-free interest rate is 0%, how would you describea long position in Composites as a combination of positions in a risk-freebond and a binary put option? Please show your workings in detial.b) Assuming that the risk-free interest rate is 0%, how would you describea long position in Composites as a combination of positions in a risk-freebond and a binary call option? Please show your workings in detial.c) Please explain the event-driven strategies through the selling insuranceview.arrow_forwardCorporation A is deciding on an acquisition. Corporation A would buy all shares of corporation B, for a total of 500,000 shares of B. Currently, corporation B is expected to pay a constant dividend forever of $12 per share. The market price of B shares reflects these expectations, and the required rate of return is 4%. A can buy B shares at their current market price, and management expects to be able to exploit synergies between the two corporations and increase revenues. Thus, according to A’s management, if the acquisition takes place the dividend per share for next year is expected to be $12, but dividends are then expected to grow forever at a rate of 3% per year. The required rate of return on stock B would stay unchanged at 4%. What is the NPV of the acquisition? .arrow_forwardAcquiring Corporation is considering a takeover of Takeover Target Incorporated. Acquiring has 16 million shares outstanding, which sell for $30 each. Takeover Target has 8 million shares outstanding, which sell for $23 each. If the merger gains are estimated at $40 million, what is the highest price per share that Acquiring should be willing to pay to Takeover Target shareholders? Highest price per sharearrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Stock Market Index Definition (BEGINNER FRIENDLY EXPLANATION!); Author: It's Your Girl Rose;https://www.youtube.com/watch?v=LxI12aUaabc;License: Standard Youtube License