What is the price per share of the acquiring firm

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Reference no: EM133491598

Case: Your company has earnings per share of $5. It has 1.5 million shares outstanding, each of which has a price of $50. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of $20. You will pay for TargetCo by issuing new shares. The expected synergy is 15 million from the transaction. Suppose you offer an exchange ratio such that, at current pre-announcement shares for both firms, the offer represents a 25% premium to buy TargetCo. The acquisition is still under negotiation, and there is a 50% probability that the takeover will be completed and a 50% probability the deal will fall apart. If the transaction fails to complete, the price of the target and acquirer will stay the same as today. Assume all market participants know this on the announcement of the takeover.

Question 1: What is the price per share of the combined corporation after the acquisition is completed?

Question 2: What is the price per share of the acquiring firm immediately after the merger is announced?

Question 3: What is the price of TargetCo immediately after the announcement?

Question 4: What is the actual premium your company will pay if the transaction is complete?

Reference no: EM133491598

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