QUESTION 3 Company A is considering acquiring Company T by means of a tender off

Question

QUESTION 3 Company A is considering acquiring Company T by means of a tender offer A has to submit a bid by Sunday The value of T depends directly on the outcome of a major oil exploration project it is currently undertaking. The result will be commonly known on Tuesday only If the project succeeds, the management will be worth $50/ share. But if the will be worth $60/ share under and ot company under current ice offer on Sunday project fails, it will be worth $10/ share. Each of these events is equally likely lf the project is a success, the company new management and otherwise it will be worth $15/ share under new management. A must make its share/ pr outcome of the drilling project is known Company T would be happy to be acquired by A, provided it is at a profitable price. This is, T will accept any offer management Suppose that Company T has to answer on Monday, before the results of the project are that is greater than the value of the company under current known. As Company A how much should you bid? Hint: What is the expectation of A regarding the value of T? After figuring out that, how much would A be willing to pay then? Less than 30, but more than 15 30 375 15 10

Explanation / Answer

Under current management T, the expected value of the company is 0.5*50+0.5*10=30. i.e. T valuation is 30.

Under new management A, the expected value of the company is 0.5*60+0.5*15=37.5 i.e. A valuation is 37.5

Clearly it is given that T will sell the company at any profitable price i.e. at any price greater than or equal to 30. Therefore A will offer 30 and T will accept.

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