Question

consider two firms, bob company and cat enterprises, both with earnings of $10 per share and 5 million shares outstanding. cat is a mature company with few growth opportunities and a stock price of $25 per share. bob is a new firm with much higher growth opportunities and a stock price of $40 per share. assume bob acquires cat using its own stock and the takeover adds no value. in a perfect capital market, how many shares must bob offer cat's shareholders in exchange for their shares?

Answer 1

In a perfect capital market, Bob must offer 3.125 million shares to the shareholders of Cat in exchange for their shares.

Step-by-step explanation:

In order to determine how many shares Bob must offer the shareholders of Cat in exchange for their shares, we need to consider the stock prices and earnings of both companies.

Bob's stock price is $40 per share and Cat's stock price is $25 per share.

We can calculate the number of shares Bob must offer using the formula:

Number of shares = (Stock price of Cat / Stock price of Bob) x Number of shares outstanding of Cat

Plugging in the values, we get:

Number of shares = (25 / 40) x 5 million

= 3.125 million shares

Therefore, Bob must offer 3.125 million shares to the shareholders of Cat in exchange for their shares.