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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...

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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.

Answered Same Day Dec 25, 2021

Solution

David answered on Dec 25 2021
111 Votes
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 cu
ent market price does this offer represent?
. 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 cu
ent market price does this offer represent?
c. At cu
ent 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.
Solution:...
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