The firm Turf plans to acquire Chit, another firm in the same industry. Both firms...
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The firm Turf plans to acquire Chit, another firm in the same industry. Both firms are financed entirely by equity and have the same business risk. There are no taxes or other market imperfections.
Turf
Chit
Price per share
9
4.40
Number of shares
20,000,000
10,000,000
Turf is considering 2 possible acquisition methods: a share exchange or a cash acquisition financed by borrowing. The acquisition will result in expected operating cost savings for the merged (post-acquisition) firm with a total present value of $45 million. Reorganisation costs for the merged business will have a present value of $10 million, regardless of the acquisition method.
Suppose Turf offers new shares in itself in exchange for Chit entire 10million shares.
(B) How many new shares should Turf issue to Chit shareholders to enable both firms' individual shareholders to experience the same proportional increase in their wealth from the acquisition? What is the merged firm's share price?
(C) What cash offer would give both firms' individual shareholders the same proportion increase in wealth?
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