Series 79 practice questionmediumMerger Consideration
Company A is acquiring Company B for $50 per share using a fixed exchange ratio of 2.5 shares of Company A for each share of Company B. If Company A's stock price declines from $20 to $16 before closing, what is the effective value per share that Company B's shareholders will receive?
- A$50.00
- B$16.00
- C$32.00
- D$40.00✓ Correct answer
Explanation
Why D — $40.00
With a fixed exchange ratio of 2.5, each Company B shareholder receives 2.5 shares of Company A. At Company A's new price of $16, the effective value is 2.5 x $16 = $40.00 per share. A fixed exchange ratio exposes target shareholders to the risk of the acquirer's stock price declining between announcement and closing. This is why some transactions use a floating exchange ratio or a collar mechanism to protect target shareholders.
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