If Rearden offers an exchange ratio such that,at current pre-announcement share prices for both firms,the offer represents a 20% premium to buy Associated Steel,then actual premium Rearden will pay will be closest to:
A)14.7%
B)18.0%
C)20.0%
D)22.4%

Question

Quizplus · Accepted Answer

A)Value of Associated Steel = $15 × 1.2 per share × 4 million shares = $72 million.Therefore Rearden will have to issue $72 million/$20 per share = 3.6 million new shares to fund the deal.This will give Rearden 10 + 3.6 = 13.6 million shares post merger.The total value of Rearden premerger is $20 per share × 10 million shares = $200 million and the value of Associated premerger is $15 per share × 4 million shares = $60 million,for a combined value of $260 million.The Associated shareholders will own 3.6/13.6 percent of the company or $260 million × 11ea7cce_3c2d_99bc_928c_1f19c9843f1a_TB1626_11 = $68.82 million in value.So Rearden is paying $68.82 million for a company worth $60 million.The premium is 11ea7cce_3c2d_99bd_928c_8f6f4b06c42c_TB1626_11 - 1 = .147 or 14.7%.

If Rearden Offers an Exchange Ratio Such That,at Current Pre-Announcement