Question

BAD​ Company's stock price is $ 40​, and the firm has 8 million shares outstanding. You believe you can increase the​ company's value if you buy it and replace the management. Assume that BAD has a poison pill with a 15 % trigger. If​ triggered, all​ BAD's shareholderslong dashother than the acquirerlong dashwill be able to buy one new share in BAD for each share they own at a 80 % discount. Assume that the price remains at $ 40 while you are acquiring your shares. If​ BAD's management decides to resist your buyout​ attempt, and you cross the 15 % threshold of​ ownership: a. How many new shares will be issued and at what​ price? b. What will happen to your percentage ownership of​ BAD? c. What will happen to the price of your shares of​ BAD? d. Do you lose or gain from triggering the poison​ pill? If you​ lose, where does the loss go​ (who benefits)? If you​ gain, from where does the gain come​ (who loses)?

Answer 1

Answer:

Explanation:

a. If you trigger the poison pill, then you own 15% of the company, or 1,200,000 shares = (15% × 8,000,000 shares). When you trigger the poison pill, every other shareholder will buy a new share for every share they hold, so 6,800,000 shares = (8,000,000 –1,200,000) will be issued. These shares will be issued at $18, which is 80% of the price immediately before triggering the poison pill (which we assume stays constant at $40).

b. After the new 6,800,000 shares are issued, there will be a total of 14,800,000 shares = (8,000,000 + 6,800,000). You will own 1,200,000 of them, so your participation will be 8.11% = (1,200,000/ 14,800,000).

c. When the poison pill is triggered, the market value of the firm will increase to $442,400,000 million [= ($40 × 8,000,000) + ($18 × 6,800,000)]. The new stock price will be $29.89 = ($442,400,000 million/14,800,000).

d. You lose from triggering the poison pill (you bought shares at $40 that are now worth $29.89).