UEST?ON 3 Company A is considering acquiring Company T by means of a tender offe
ID: 1161319 • Letter: U
Question
UEST?ON 3 Company A is considering acquiring Company T by means of a tender offer A has to submit a bid by Sunday The value of T depends directly on the outcome of a e under new management. A must make its share/ price offer on Sunday T it is currently undertaking The result will be commonly known on Tuesday only If the project succeeds, the company under current ch of these events is equally likely If the project is a success, the company management wil be worth $50i share. But if the project fails, it wll be worth $10/ share. Ea will be worth $60/ share under new management and otherwise it t and otherwise it will be worth $15/ shar ny T would be happy to be acquired by A, provided it is at a profitable price. This is, T will accept any offer that is greater than the value ot the company under current management Suppose that Company T has to answer on Monday, before the results of t known. As Company A, how much should you bid? y T has to answer on Monday, before the results of the project are Hint: What is the expectation of A regarding the value of T? After figuring out that, houe much would A be willing to pay then? Less than 30, but more than 15 0 30 375 15 10Explanation / Answer
In this scenario, Company A will first evaluate the worth of the Company T under new management (i.e. expectation of A regarding the value of T). Afer estimating the value of Company T under new management, Company A will compare this value to the value of Company T under current management. In order to estimate the value of Company T under current management or under new management, we will have to calculate the value of Company T using equal probabilities of oil exploration project success and failure.
The value of company T under the current management: $50/share*50% + $10/share*50% = $30/share
The value of company T under the new management: $60/share*50% + $15/share*50% = $37.5/share
Now, since company T is willing to be acquired if it is provided with a value more than under current management, company A should bid $37.5.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.