4.1 Could someone show me the steps to solving this problem, please? On January
ID: 2720486 • Letter: 4
Question
4.1 Could someone show me the steps to solving this problem, please?
On January 4th, 2016 LAFCO Industries (LAF) announced a proposed acquisition of Siebel Incorporated (SINC) for $15/share in cash. The deal was expected to close on 9/30/2016. In trading on 1/4/2016, SINC shares traded for $14.05 and LAF shares traded for $12.06. Assume that interest rates are 4% p.a. (APR) compounded daily, and that present and future values are based on the assumption that a year has 360 days. Ignore any taxes and other transaction costs. If you want to perform an arbitrage transaction with two million SINC shares, how much money would you borrow on 1/4/2016? ($29,113,414.53) What would your profit be on the announcement day if you executed an arbitrage transaction with two million SINC shares? ($1,013,414.53) How much money would you lose (ignoring the announcement day profit) if the closing of the transaction were delayed until 12/30/2016 (the last trading day of the year)? ($304,855.01)Explanation / Answer
1) The money that would be borrowed per share = 15/(1+0.04/360)^270 = 14.5567072626
The interest rate becomes 0.04/360 and the no of days of compounding is 270 from 4th of January to 30th of September.
for 2 million shares = 2*14.5567072626 = 29.11341453 millions = $29,113,414.53
This is the PV of the 2 million shares that would have a price of $15 by 30th September.
2) Profit on announcement day = 2000000(14.5567072626-14.05) = $1,013,414.53
After announcement the share price would be 14.55.............(the discounted value of $15)
3) amount to be repaid on the loan would be = 29,113,414.53*(1+0.04/360)^361 = 30304855.02
Value of 2 million shares = 2,000,000*15 = $30,000,000
Therefore, loss = $304,855.02
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