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At what exchange ratio of B shares to T shares

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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

5,800

1,700

Price per share

$55

$25

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $8,100. Firm T can be acquired for $27 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?

At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers?

Reference no: EM132975542

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