Firm A is worth $200 million as an independent firm and Firm B is worth $30 million as an independent firm. Firm A currently has 2 million shares outstanding and Firm B has 3 million shares outstanding. If the firm's merge the total value of the merged firm is $240 million.
Suppose Firm A offers to buy Firm B for $13 a share and the board's of both firms have agreed to the deal. However, the market is unsure whether regulators will approve the merger and thus they believe that the deal will only go through with a probability of 1/2. Given this information:
(a) What would the stock price of Firm B to be immediately after the announcement of the merger agreement?
(b) What would the stock price of Firm A be immediately after the announcement of the merger agreement?
(c) Suppose now you are unsure about the probability that the market assigns to the deal being consummated. If the stock price of Firm B goes to $12 after the announcement, what would this imply about the market's assessment of the probability that the deal is consummated?