Doubts

Ch. 7 - Exercise 2 (In-class slides)

Ch. 7 - Exercise 2 (In-class slides)

by Pietro Loser -
Number of replies: 1

Good morning Professor,

I have a doubt about point (C) of exercise 2.

Point (c) asks, "What is the cost of the acquisition if A offers one share of A for every three shares of B?". 

What I don't understand is why you consider the number of shares and the stock price of (A,B) when the question says that they are selling a stake of firm A for company B?

When calculating the cost of the stock offer, do we always have to calculate the "Amount Paid" on the PV(A,B)? 

Thanks in advance,

Pietro Loser

In reply to Pietro Loser

Re: Ch. 7 - Exercise 2 (In-class slides)

by Julio Crego -
Dear Pietro,

Note that the shares of A provide the right to collect all cash flows of AB after the acquisition; hence, shareholders of A give up cash flows of AB to buy B. In return, they receive B.

Yes, we always use AB in a stock offer.