Sol Company has announced plans to acquire Luna Corporation at a premium of 20% over the pre-announcement share price.Sol is trading for $42 per share,and has a premerger value of $14 billion.Prior to the announcement,Luna was trading for $71 per share,and currently has 106 million shares outstanding.The projected synergies from the merger are $1.5 billion.What is the maximum exchange ratio that Sol could offer in a stock swap transaction and still generate a positive NPV?

Question

Quizplus · Accepted Answer

To find the maximum exchange ratio that Sol could offer in a stock swap transaction and still generate a positive NPV, we first calculate the value of Luna with the premium: $71 * 1.20 = $85.2 per share. The total value of Luna with the premium is $85.2 * 106 million = $9.0312 billion. The combined value of Sol and Luna, including synergies, is $14 billion + $9.0312 billion + $1.5 billion = $24.5312 billion. The number of Sol shares pre-merger is $14 billion / $42 = 333.333 million shares. To ensure a positive NPV, the value per share post-merger must be greater than $42. The maximum number of shares Sol can issue without diluting below $42 per share value is found by dividing the combined company value by $42: $24.5312 billion / $42 = 583.6 million shares. The maximum additional shares Sol can issue is 583.6 million - 333.333 million = 250.267 million shares. The maximum exchange ratio is 250.267 million / 106 million = 2.36, rounded to 2.37.

Sol Company Has Announced Plans to Acquire Luna Corporation at a Premium