question archive Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T)
Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T)
Subject:FinancePrice:2.86 Bought3
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 | Firm T | |||||
| Shares outstanding | 5,000 | 1,600 | ||||
| Price per share | $ | 51 | $ | 20 | ||
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,200. Firm T can be acquired for $22 per share in cash or by exchange of stock wherein B offers one of its shares 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.)
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Net Present value of the stock exchange = Current value of the target firm + Synergy - Offer value
=(1600 *20) + 9200 - (1600*22)
= 6000
Share price of the acquiring firm (Firm B)= (NPV + Current value)/ no of shares = ((5000 *51) +6000) / 5000 =52.20
Exchange ratio = Acquisition price/ Share price of Firm B = 22/ 52.20 = 0.4215 to 1
