What is the incremental value of the acquisition

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Dumb Jack Ltd. is considering making an offer to acquire Smart Smith Ltd. Before the announcement, Dumb Jack has a market value of $6 million and its shares are trading at $40 per share. Smart Smith has 50,000 shares outstanding with a share price of $15. Smart Smith can be acquired for $22 per share in cash or by exchange of stocks wherein Dumb Jack offers one of its share for every two of Smart Smith's shares. The value of Smart Smith to Dumb Jack is expected to be $1.6 million.

Required:

(a) What is the incremental value of the acquisition to Dumb Jack?

(b) Should Dumb Jack make a cash offer or a stock offer? Show all necessary calculations.

(c) Suppose the market currently estimates a 60 percent probability that Dumb Jack will go ahead with the acquisition with a stock offer. What will the market value of Dumb Jack be immediately after the announcement of the acquisition?

(d) At what exchange ratio of Dumb Jack shares to Smart Smith shares, would the shareholders in Smart Smith be indifferent between a stock offer and the cash offer? You don't need to consider the probability of acquisition in this part.

Reference no: EM133056138

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