What is the maximum price per share

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Reference no: EM132758061

Question: Hyundai Motor Company, an automobile manufacturer, is considering the acquisition of Cooper Tire, a firm that manufactures automobile tires. Hyundai has estimated a potential annual gain in operating cash flows from the acquisition to be $400,000 per annum. Hyundai currently has 4 million shares on issue at a market price of $3.00 per share, whilst Cooper Tire has 2 million shares listed at a market price of $2.50 per share. The management of Hyundai is considering making an offer to Cooper Tire shareholders of either $3.00 per share or alternatively one share in Hyundai for every one Cooper Tire share that Cooper Tire shareholders currently hold. Assume that the appropriate discount rate is 10% p.a. and ignore other factors that are not stated here.

Based on the information above, answer the following questions 27(a)-27(e). You need to show all your workings along with the final answers.

(a) What is the type of this takeover plan based on the industries of Hyundai and Cooper Tire? Suggest any specific sources of the potential takeover gains in this particular takeover plan.

(b) Assuming that operating cash flows occur at year end, what is the takeover gain in present value terms that would be created if the acquisition were to proceed immediately?

(c) Provide advice to management as to the difference, if any, the two proposals may have on the wealth of existing Hyundai shareholders.

(d) What is the maximum price per share that Hyundai could offer Cooper Tire shareholders in a cash bid?

(e) Suppose that the share offer is (re)structured such that the expected gain is split equally both in a cash offer and in a share offer. Why might the bidding firm's shareholders prefer to offer shares rather than cash? Why might the target firm's shareholders prefer to receive shares rather than cash?

Reference no: EM132758061

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