Assume company Banana, with a market value of $$200,000,$ wants to buy company

Grape, with a market value of $$100,000.$ Banana has two scenarios for the synergy gains

$($i$)$ an optimistic one, with $$16,000$ per year in perpetuity and $($ii$)$ a pessimistic one, with

$$6,000$ per year in perpetuity. The discount rate is $10\%.$

a$)$ Before and without doing any calculations, discuss and explain in detail what are

the pros and cons of bidding with stock and bidding with cash in optimistic and

pessimistic scenarios.

$[9$ marks$]$

b$)$ Assume a $100\%$ cash bid offer X$.$ What are the minimum and maximum X$,$ in both

scenarios, that are consistent with the merger going through? Assume there is no

information asymmetry.

$[8$ marks$]$

c$)$ Assume a $100\%$ stock bid offer. Banana offers Grape$$s shareholders an s stake in

the merged company. What are the minimum and maximum values of s$,$ in both

scenarios, that are consistent with the merger going through? Assume that Grape

shareholders believe in the scenario proposed by Banana, i$.$e$.,$ there is no

information asymmetry.

Answer rating: 100% (QA)

a Pros and cons of bidding with stock Pros 1 Stock offers can be attractive to Grape shareholders as they allow them to become shareholders in the larger combined company potentially benefiting from f... View the full answer