Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T).
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 | 4,800 | 1,200 | ||||
Price per share | $ | 44 | $ | 16 | ||
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $8,900. Firm T can be acquired for $18 per share in cash or by exchange of stock wherein B offers one of its shares for every two of T's shares.
Are the shareholders of Firm T better off with the cash offer or the stock offer?
Cash offer is better
Share offer is better
At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates