Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Shares outstanding 5,800 Price per share Firm B Firm T 1,700 $ 55 $ 25 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $8,100. Firm T can be acquired for $27 per share in cash or by exchange of stock wherein B offers one of its share for every two of T's shares. Are the shareholders of Firm T better off with the cash offer or the stock offer? Cash offer is better Share offer is better At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., .1616.) Exchange ratio

Question
Consider the following premerger information about a bidding firm (Firm B) and a target
firm (Firm T). Assume that both firms have no debt outstanding.
Shares outstanding 5,800
Price per share
Firm B Firm T
1,700
$ 55 $ 25
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is
$8,100. Firm T can be acquired for $27 per share in cash or by exchange of stock
wherein B offers one of its share for every two of T's shares.
Are the shareholders of Firm T better off with the cash offer or the stock offer?
Cash offer is better
Share offer is better
At what exchange ratio of B shares to T shares would the shareholders in T be
indifferent between the two offers? (Do not round intermediate calculations and round
your answer to 4 decimal places, e.g., .1616.)
Exchange ratio
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Transcribed Image Text

Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Shares outstanding 5,800 Price per share Firm B Firm T 1,700 $ 55 $ 25 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $8,100. Firm T can be acquired for $27 per share in cash or by exchange of stock wherein B offers one of its share for every two of T's shares. Are the shareholders of Firm T better off with the cash offer or the stock offer? Cash offer is better Share offer is better At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., .1616.) Exchange ratio

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