Figure out the share exchange ratio of Firm A to Firm B where the shareholders of Firm B are indifferent between cash acquisition and stock acquisition.

1. Answer the questions based on the table below.

Cash Dividend Stock Repurchases Stock Dividend
Value of Operations $900,000,000 $900,000,000 $900,000,000
Value of Cash balance 80,000,000 80,000,000 80,000,000
Total value of firm $980,000,000 $980,000,000 $980,000,000
− Debt 100,000,000 100,000,000 100,000,000
− Preferred stock 80,000,000 80,000,000 80,000,000
Value of equity $800,000,000 $800,000,000 $800,000,000
# of shares Before the event 40,000,000 40,000,000 40,000,000
Stock price Before the event $20 $20 $20
# of shares After the event ( ) ( ) ( )
Stock price After the event ( ) ( ) ( )
1) The firm considers cash dividend using the cash balance of $80,000,000.
i) Figure out the dividend per share. (15points)

ii) Once the cash dividend is completed, figure out the stock price. (15points)

2) The firm considers stock repurchase using the cash balance of $80,000,000.

i) Figure out how many shares this firm can repurchase. (15points)

ii) Once the stock repurchase is completed, figure out the stock price. (20points)

3) The firm considers a 25% stock dividend.
i) Figure out how many new shares this firm can issue. (15points)

ii) Once the stock dividend is completed, figure out the stock price. (20points)

2. Answer the questions based on the table below.

Before rights offering After rights offering
Value of equity $200,000,000 ( )
# of shares 10,000,000 ( )
Stock price $20 ( )
New equity capital raised $40,000,000
Subscription price $10
# of new shares ( )
# of rights ( )
Conversion ratio for a right to a new share ( )
Value of a right ( )

1) Figure out the number of new shares issued given the subscription price. (25points)

2) Figure out the conversion ratio for rights to a new share. (25points)

3) Figure out the stock price after the rights offering. (30points)

4) Figure out the value of a right. (20points)

3. Firm A tries to acquire Firm B. Assume that both firms have no debt outstanding. Firm A estimates that the value of synergistic benefits from Firm B is $10,000,000.

Firm A Firm B Firm AB
Cash acquisition Stock acquisition
Earnings $5,000,000 $1,000,000 $6,000,000 $6,000,000
Stock price $40 $20 $ ( ) $ ( )
# of shares 1,000,000 500,000 1,000,000 ( )

Supposed Firm A tries to acquire Firm B for $30 per share in cash.

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1) Figure out the NPV of the merger. (20points)

2) Figure out the stock price of the merged firm. (20points)

Suppose Firm B prefers stock acquisition instead of cash acquisition of $30 per share. If Firm A offers one share for every two of Firm B’s shares.

1) Figure out the number of stocks and the stock price of the merged firm. (20points)

2) Figure out the NPV of the merged firm.(20points)

3) Figure out the share exchange ratio of Firm A to Firm B where the shareholders of Firm B are indifferent between cash acquisition and stock acquisition. (20points)

4. Answer the questions.

1) With Dutch auction underwriting, all successful bidders pay the same price per share. (15points)
a. True b. False

2) Underpricing is the difference between the underwriters’ cost of buying shares and the offering price of those securities to the public. (15points)
a. True b. False

3) According to Green Shoe provision, underwriters can purchase additional shares at a lower price than the offering price to cover excess demand. (15points)
a. True b. False

4) Stock repurchase may send a negative signal that a firm does not have any profitable investment opportunities. (15points)
a. True b. False

5) According to Dividend preference theory, higher payout leads to lower agency costs, thereby resulting in higher stock price. (15points)
a. True b. False

6) Employee stock options (ESO)s are “out-of-the money” when they are issued. (15points)
b. True b. False

7) Employee stock options (ESO) backdating is a practice of selecting a grant date on which the stock price is low. Therefore, this practice is illegal or unethical. (15points)
c. True b. False

8) In convertible bonds, conversion premium is the difference between conversion price and bond price, divided by bond price. (15points)
b. True b. False

9) Stock warrants are long-maturity call options like ESO, while they are listed and traded on the exchange unlike ESO. (15points)
b. True b. False

10) If managers ignore real options such as option to wait, they could underestimate the NPV of a project. (15points)
c. True b. False

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