Consider the following premerger information about a bidding firm (Firm B) and a

Question

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 has estimated that the value of the synergistic benefits from acquiring Firm T is $9,400. Firm T can be acquired for $18 per share in cash or by exchange of stock wherein B offers one of its share for every two of T's shares.

At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

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.

Explanation / Answer

COST OF ACQUISITION FOR FIRM B

1) CASH OFFER : NO OF SHARES x PRICE / SHARE

1300 X 18 = $ 23400

2) STOCK OFFER

STOCK SWAP RATIO - 1 : 2 ( ONE SHARE OF B FOR EVERY SHARE OF T )

SO 650 X 45 = $ 29,200

FROM THE ABOVE CALCULATION IT IS CLEAR THAT THE COST OF ACQUISITION IS LEAST FOR CASH OFFER.

SO CASH OFFER IS BETTER

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