How do you find the control premium?

How do you find the control premium?

• A. The premium paid by the acquirer to the target's management
• B. The difference between the share price prior to announcement and the offer price
• C. The difference between the post-announcement price and the offer price
• D. The premium paid by the acquirer in debt financing

Answer: (B)

Control premium measures how much more the acquirer is paying to gain control, above the target’s current market value. It’s usually found by taking the difference between the offer price and the target’s share price just before the deal is announced, giving the premium in dollars; you can also express it as a percentage of the pre-announcement price. That’s why the correct approach is the difference between the pre-announcement share price and the offer price. For example, if the price before the announcement is $50 and the offer is $60, the premium is $10, or 20% of the pre-announcement price. The other options aren’t appropriate because the premium isn’t paid to management, it isn’t determined by post-announcement market price, and it isn’t about debt financing.

Control premium measures how much more the acquirer is paying to gain control, above the target’s current market value. It’s usually found by taking the difference between the offer price and the target’s share price just before the deal is announced, giving the premium in dollars; you can also express it as a percentage of the pre-announcement price. That’s why the correct approach is the difference between the pre-announcement share price and the offer price. For example, if the price before the announcement is $50 and the offer is $60, the premium is $10, or 20% of the pre-announcement price. The other options aren’t appropriate because the premium isn’t paid to management, it isn’t determined by post-announcement market price, and it isn’t about debt financing.