1.If companies in the same industry as TargetCo (from Problem 9) are trading at multiples of 14 times earnings, what would be one estimate of an appropriate premium for TargetCo?

2.You are invested in GreenFrame, Inc. The CEO owns 3% of GreenFrame and is considering an acquisition. If the acquisition destroys $50 million of GreenFrame’s value, but the present value of the CEO’s compensation increases by $5 million, will he be better or worse off?

3.Loki, Inc., and Thor, Inc., have entered into a stock swap merger agreement whereby Loki will pay a 40% premium over Thor’s premerger price. If Thor’s premerger price per share was $40 and Loki’s was $50, what exchange ratio will Loki need to offer?

4.The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading for $35 per share and LE is trading for $25 per share, implying a premerger value of LE of approximately $4 billion. If the projected synergies are $1 billion, what is the maximum exchange ratio NFF could offer in a stock swap and still generate a positive NPV?

5.Let’s reconsider part (b) of Problem 9. The actual premium that your company will pay for TargetCo will not be 20%, because on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for TargetCo. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover.

a. What is the price per share of the combined corporation immediately after the merger is completed?

b. What is the price of your company immediately after the announcement?

c. What is the price of TargetCo immediately after the announcement?

d. What is the actual premium your company will pay?

6.ABC has 1 million shares outstanding, each of which has a price of $20. It has made a takeover offer of XYZ Corporation which has 1 million shares outstanding, and a price per share of $2.50. Assume that the takeover will occur with certainty and all market participants know this. Furthermore, there are no synergies to merging the two firms.

a. Assume ABC made a cash offer to purchase XYZ for $3 million. What happens to the price of ABC and XYZ on the announcement? What premium over the current market price does this offer represent?

b. Assume ABC makes a stock offer with an exchange ratio of 0.15. What happens to the price of ABC and XYZ this time? What premium over the current market price does this offer represent?

c. At current market prices, both offers are offers to purchase XYZ for $3 million. Does that mean that your answers to parts (a) and (b) must be identical? Explain.

7.BAD Company’s stock price is $20, and the firm has 2 million shares outstanding. You believe you can increase the company’s value if you buy it and replace the management. Assume that BAD has a poison pill with a 20% trigger. If it is triggered, all BAD’s shareholders—other than the acquirer—will be able to buy one new share in BAD for each share they own at a 50% discount. Assume that the price remains at $20 while you are acquiring your shares. If BAD’s management decides to resist your buyout attempt, and you cross the 20% threshold of ownership:

a. How many new shares will be issued and at what price?

b. What will happen to your percentage ownership of BAD?

c. What will happen to the price of your shares of BAD?

d. Do you lose or gain from triggering the poison pill? If you lose, where does the loss go (who benefits)? If you gain, from where does the gain come (who loses)?

8.How does a toehold help overcome the free rider problem?

9.You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company. UnderWater’s stock price is $20, and it has 2 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 40%. You are planning on doing a leveraged buyout of UnderWater, and will offer $25 per share for control of the company.

a. Assuming you get 50% control, what will happen to the price of non-tendered shares?

b. Given the answer in part (a), will shareholders tender their shares, not tender their shares,or be indifferent?

c. What will your gain from the transaction be?