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 Firm T Shares outstanding 4,600 1,000 Price per share $ 40 $ 14 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $8,800. Firm T can be acquired for $16 per share in cash or by exchange of stock wherein B offers one of its share for every two of T's shares. Are the shareholders of Firm T better off with the cash offer or the stock offer

Answer 1

Answer:

The answer is "Share offer is better".

Explanation:

Firstly Computing the value of the combined company:

The merger value = the market value of the B company + the market value of the T + synergically advantages

= shares issued * share price of company B + outstanding shares * price per share of company T + benefits for synergies

$=4,600 \times \ 40+1,000\times \ 14+\ 8,800\\\\=\ 206,800$

Number of new shares which have been created following the merger = the number of shares in the T *exchange ratio

$=1000 \times \frac{1}{2}\\\\=500 \ shares$

The percentage price of the fusion company = the value of the fusion company /the share value of the fusion company

The per-share price of the combined company$=\frac{\ 206,800}{4,600+500}=\frac{\ 206,800}{5,100}=\ 40.55$

The cash offer value = 16 dollars per share

Stock offer value = price of merged company share /2 $= \frac{\ 40.55}{2}=\ 20.27 / \ share$

Thus, share offer is better