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Unformatted text preview: UNIVERSITY OF TORONTO Joseph L. Rotman School of Management RSM333 PROBLEM SET #2 1. Suppose we have an acquirer A and a target B. Both &rms are all equity. A has 25 million shares outstanding at $10/share, while B has 5 million shares outstanding at $8/share. The deal designers have identi&ed three cases: i) The synergies that will be created are estimated to have a PV of $10 million. ii) The synergies that will be created are estimated to have a PV of $5 million. iii) The synergies that will be created are estimated to have a PV of $15 million. (a) Suppose A o¡ers to buy B in an all-cash deal and to pay $50 million to the share- holders of B. In each case, determine whether the shareholders of A or B stand to gain or lose, and by how much. (b) Now, suppose A and B as above, but now A will pay for B by issuing 5 million shares of A and exchanging these new shares of A for all the shares of B on a one-for- one basis. In each case, determine whether the shareholders of A or B stand to gain or lose, and by how much. (c) What can you conclude regarding the bene&t to the acquirer, based on the rela- tionship between the premium paid and the synergies created by the transaction? 2. You are given the following prices: Security Maturity (years) Strike Price (today) ABC stock ¢ ¢ $84 Put on ABC stock 1 $70 $5 Call on ABC stock 1 $70 ? T-bill (FV=100) 1 ¢ $91 (a) What is the price of the call option? (b) Assume that there are no transaction costs and suppose that the market price of an ABC call option with strike price $70 and maturity in one year from now is $28. You immediately tell your friend that you found a di¡erent price in part (a), but he replies that you must be wrong: markets should be e£ cient and the price you computed in...
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- Spring '11