BAD Company's stock price is $ 40, and the firm has 8 million shares outstanding. You believe you can increase the company's value if you buy it and replace the management. Assume that BAD has a poison pill with a 15 % trigger. If triggered, all BAD's shareholderslong dashother than the acquirerlong dashwill be able to buy one new share in BAD for each share they own at a 80 % discount. Assume that the price remains at $ 40 while you are acquiring your shares. If BAD's management decides to resist your buyout attempt, and you cross the 15 % threshold of ownership: a. How many new shares will be issued and at what price? b. What will happen to your percentage ownership of BAD? c. What will happen to the price of your shares of BAD? d. Do you lose or gain from triggering the poison pill? If you lose, where does the loss go (who benefits)? If you gain, from where does the gain come (who loses)?

Explanation:

a. If you trigger the poison pill, then you own 15% of the company, or 1,200,000 shares = (15% × 8,000,000 shares). When you trigger the poison pill, every other shareholder will buy a new share for every share they hold, so 6,800,000 shares = (8,000,000 –1,200,000) will be issued. These shares will be issued at $18, which is 80% of the price immediately before triggering the poison pill (which we assume stays constant at $40).

b. After the new 6,800,000 shares are issued, there will be a total of 14,800,000 shares = (8,000,000 + 6,800,000). You will own 1,200,000 of them, so your participation will be 8.11% = (1,200,000/ 14,800,000).

c. When the poison pill is triggered, the market value of the firm will increase to $442,400,000 million [= ($40 × 8,000,000) + ($18 × 6,800,000)]. The new stock price will be $29.89 = ($442,400,000 million/14,800,000).

d. You lose from triggering the poison pill (you bought shares at $40 that are now worth $29.89).