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Hi, I have pasted the question below I do not understand the answer to question C - how would the equity holder of B receive 6000 when it is
Hi, I have pasted the question below
I do not understand the answer to question C -> how would the equity holder of B receive 6000 when it is acquired for 16001
It contradict question b
For each of the following scenarios, estimate how much value an acquisition will create, how much of that value will be appropriated by each of the bidding firms, and how much of that value will be appropriated by each of the target firms. In each of these scenarios, assume that firms do not face significant capital constraints.
A bidding firm, A, is worth $27,000 as a stand alone entity. A target firm, B, is worth $12,000 as a stand alone entity, but $18,000 if it is acquired and integrated with Firm A. Several other firms are interested in acquiring Firm B, and Firm B is also worth $18,000 if it is acquired by these other firms.
a) If A acquired B, would this acquisition create value? If yes, how much? How much of this value would the equity holders of A receive? How much would the equity holders of B receive?
b)The same scenario as in a, except that the value of B if it is acquired by the other firms interested in it is only $12,000.
c) The same scenario as in a, except that the value of B if it is acquired by the other firms interested in it is $16,000.
Answer 1:
a) If A acquired B, economic value would be created (in the amount of $6,000). The equity holders of A would receive 0 value (assuming that the acquisition price was $18,000 or the value of B when combined with A). The equity holders of the target firm, B, would receive $6,000 in equity.
b) In this scenario, Firm A will pay slightly higher than all other bidding firms as the public "value" of the target for all other firms is $12,000 but for Firm A it is $18,000. Therefore, all other firms are only willing to pay up to $12,000 for the target. Firm A, however, is willing to pay (let's assume) up to $12,001 for the target B. Therefore, the added value for Firm A is $5,999. This added value will accrue to the equity holders of Firm A. The equity holders of Firm B will not receive any additional equity from the acquisition.
C) In this scenario Firm A will pay slightly higher than all other bidding firms as the public "value" of the target for all other firms is $16,000 but for Firm A it is $18,000. Therefore all other firms are only willing to pay up to $16,000 for the target. Firm A, however, is willing to pay (let's assume) up to $16,001 for the target B. Therefore the added value for Firm A is $1,999. This added value will accrue to the equity holders of Firm A. The equity holders of Firm B will gain approximately $6,000 in equity from the acquisition
