An acquiring company is considering a takeover of a target company.The acquiring company has 15 million shares outstanding with $30 per share.The target company has 8 million shares outstanding which sell for $24 per share.If the acquiring company estimates that merger gains will be $16 million, determine what the highest price will be paid per share for the target.
A)$24
B)$26
C)$28
D)$30

Question

Quizplus · Accepted Answer

The highest price per share that the acquiring company can pay for the target is calculated by distributing the merger gains over the target company's shares and adding it to the target's current share price. The merger gains are $16 million, and the target company has 8 million shares outstanding. So, the additional value per share due to merger gains is $16 million / 8 million shares = $2 per share. Adding this to the target's current share price of $24 gives a highest price of $26 per share.

An Acquiring Company Is Considering a Takeover of a Target