Your company has earnings per share of $5. It has 1 million shares outstanding,
ID: 2800699 • Letter: Y
Question
Your company has earnings per share of $5. It has 1 million shares outstanding, each of which has a price of $39.
You are thinking of buying TargetCo, which has earnings of $2 per share, 1 million shares outstanding, and a price per share of
$21. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offered an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 21%
premium to buy TargetCo. However, the actual premium that your company will pay for TargetCo when it completes the transaction will not be 21%, because on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for TargetCo without any synergies. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover (ignore time value of money).
a. What is the price per share of the combined corporation immediately after the merger is completed?
b. What is the price of your company immediately after the announcement?
c. What is the price of TargetCo immediately after the announcement?
d. What is the actual premium your company will pay?
a. What is the price per share of the combined corporation immediately after the merger is completed?
The price per share of the combined corporation immediately after the merger is completed will be (Round to the nearest cent.)
b. What is the price of your company immediately after the announcement?
The price of your company immediately after the announcement is per share. (Round to the nearest cent.)
c. What is the price of TargetCo immediately after the announcement?
The price of TargetCo immediately after the announcement is $per share. (Round to the nearest cent.)
d. What is the actual premium your company will pay?
This Question: 1 pt This Quiz: 4 pts p Your cempary has eanings per share of S5. t has 1 milon shars outstandng, each of wnch has a pice af $33. Yeu ara thisking of uying argeco, weich hes eamngs cf $2 per chare, 1 milion shares outetancing, and a price per share of $21. You wil pay for TargatCo by issuing new shares. There are no expected syna from the transaction Suppose you offered an exchange ratio such th buy TargeCc Howe the actual premium that your company wil pay for Targe Cow era completes the, transaction will not be 21%, becase on the annonce the target price will go up and your price will go down to refleci the fact that you are wiling to pay a premium fer TargetCo waith out any synsarges Assume that the takeover will occur with certainty and all market participants know this on the snnouncoment of the takeover (ignora time valae of maney) a. What is the price per share of the combined corporation immediately after the merger is comgletes? h. What is the price of your company immediately afer the announcament? c. What is the price of Target Co immedately after the anncuncement? d. What is the actual premium your company will pay? at, cure re-aneuncement sheepneesfor bot s lheo e represents a 215 prem The price per share of the combned corporation immediately ster the merger is completed willbe (Round to the nearest cent) h. What is the price of your cormpany immediately ater the anneuncerment? The price of your company immediately ater the announcement is per shire. (Round to the nearest cent ) c. What is the price of TargetCo immediately ater the announcement? The price af Targat Co immediately ater the announcement is spar share. (Round to the nearest cm.) d. What is the actual premium your company will pay? Enter your answer n each of the answer boxes save for Later 1270572017 assastanor with soluturon to taitowing AnsweredExplanation / Answer
Share price of acquiring company = $39
Share price of target company = $21
Value of Target Co = outstanding shares x share price = 1mn shares x 21 = $ 21million
Cost of Acquisition = 21million x 121% = $ 25.41 million
No of shares to be issued = 25.41 / 39 = 651538 shares of acquiring company
Exchange Ratio = 651538 shares / 1000,000 = 0.6515
a. What is the price per share of the combined corporation immediately after the merger is completed?
Price after merger = combined value of firms/ total shares outstanding after acquisition
= (39 million + 21 million ) / 1651538 = $ 36.33
b. What is the price of your company immediately after the announcement?
on the announcement the target price will go up and acquiring company price will go down to reflect the fact that you are willing to pay a premium for TargetCo without any synergies
Price of Acquiring company after announcement = Price after merger = $ 36.33
c. What is the price of TargetCo immediately after the announcement?
Price of TargetCo after the announcement = 24 x 121% = $29.04
d. What is the actual premium your company will pay
Company is paying 21% premium.
However, actual premium company will pay at the time of acquisition will be ZERO, because on the announcement the target price will go up and acquiring company price will go down to wipe out the possible premium in market.
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