Lindbergh Airlines is planning to make an offer for Flight Simulators Inc. The shares of Flight Simulators are currently selling for $30 per share.
a. If the tender offer is planned at a premium of 60 percent over market price, what will be the offered share price for Flight Simulators?
b. Suppose before the offer is actually announced the share price of Flight Simulators rises to $42 because of strong merger rumours. If you buy the shares at that price and the merger goes through at the price computed in part a, calculate your percentage gain?
c. There is always the possibility that the merger will be called off after it is announced and the share will fall to their original price. Calculate your loss if this occurs.
d. If there is a 75 percent probability that the merger will go proceed and only a 25 percent chance that it will be called off, does this appear to be a good investment? Assume your purchase price was $42.