Answer:
A. Share Offer Is Better
B. .4569
Explanation:
A. Based on the information given the shareholders of Firm T will be better off with the STOCK OFFER because cash offer is the amount of $22 per share.
B. Calculation to determine the exchange ratio of B shares to T shares
First step is to calculate the New shares created
New shares created = 1,800(1/2)
New shares created = 900 new shares
Second step is to calculate the value of the merged firm
Value of the merged firm= 4,800($47) + 1,800($20) + $9,100
Value of the merged firm= $270,700
Third step is to calculate the price per share of the merged firm
Price= $270,700/(4,800 + 900)
Price= $270,700/5,700
Price= $47.49
Fourth step is to calculate the Equity offer value
Equity offer value = (1/2)($47.49)
Equity offer value = $23.75 per share
Fifth step is to calculate the post merger share price
Value of the merged firm= $270,700
Shares in new firm = 4,800 + 1,800x
Hence:
Post merger share price:
P= $270,700/(4,800 + 1,800x)
Sixth step
For the target firm’s shareholders to be indifferent which means they have to receive the same wealth
Hence;
1,800(x)P= 1,800($22)
Let solve this equation for P
P= $22/x
Now Let Combine the two equations
$270,700/(4,800 + 1,800x) = $22/x
x= .4569
Seventh step is to calculate the NPV
NPV = 1,800($20) + $9,100 – 1,800($22)
NPV = $5,500
Eight step is to calculate the Share price
Share price = [4,800($47) + $5,500]/4,800
Share price = $48.15
Now let calculate the Exchange ratio
Exchange ratio = $22/$48.15
Exchange ratio = .4569
Therefore the exchange ratio of B shares to T shares that the shareholders in T would be indifferent between the two offers is .4569
