Company P has 4 million shares in issue and Company Q 12 million. On day 1 the marketvalue per share for Company P is £3.50, and for Company Q is £5.00. On day 2, themanagement of Company Q decides at a private meeting, to make a cash takeover bid forCompany P at a price of £5.00 per share. The takeover will produce large operating savingswith a value of £12 million. On day 4, Company Q publicly announces an unconditional offerto purchase all the shares of Company P at a price of £5.00 per share with settlement on day20. Details of the large savings are not announced and are not public knowledge. On day 12,Company Q announces details of the savings, which will be derived from the takeover.Required:Ignoring tax and the time-value of money between days 1 and 20, and assuming the detailsgiven are the only factors having an impact on the share prices of Company Y and Z, determinethe day 2, day 4, and day 12 share prices of Company P and Company Q if the market is:1. Semi-Strong Efficient.2. Strong Form Efficient.In each of the following circumstances:(i) The purchase consideration is cash as specified above, and(ii) The purchase consideration, decided upon on day 2, and publicly announced on day 4,is one newly issued share of Company Q for each share of Company P.

Let us assume that the purchase consideration is cash. On day 2, the price of the stocks is as…

Ignoring tax and the time-value of money between days 1 and 20, and assuming the details given are the only factors having an impact on the share prices of Company Y and Z, determine the day 2, day 4, and day 12 share prices of Company P and Company Q if the market is: 1. Semi-Strong Efficient. 2. Strong Form Efficient.

Ignoring tax and the time-value of money between days 1 and 20, and assuming the details given are the only factors having an impact on the share prices of Company Y and Z, determine the day 2, day 4, and day 12 share prices of Company P and Company Q if the market is: 1. Semi-Strong Efficient. 2. Strong Form Efficient.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 12P

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Company P has 4 million shares in issue and Company Q 12 million. On day 1 the market value per share for Company P is £3.50, and for Company Q is £5.00. On day 2, the management of Company Q decides at a private meeting, to make a cash takeover bid for Company P at a price of £5.00 per share. The takeover will produce large operating savings with a value of £12 million. On day 4, Company Q publicly announces an unconditional offer to purchase all the shares of Company P at a price of £5.00 per share with settlement on day 20. Details of the large savings are not announced and are not public knowledge. On day 12, Company Q announces details of the savings, which will be derived from the takeover. Required: Ignoring tax and the time-value of money between days 1 and 20, and assuming the details given are the only factors having an impact on the share prices of Company Y and Z, determine the day 2, day 4, and day 12 share prices of Company P and Company Q if the market is:…
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