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Big Fish Inc. is acquiring Little Fish Ltd. Big Fish's share price is $10 and Little...

Big Fish Inc. is acquiring Little Fish Ltd. Big Fish's share price is $10 and Little Fish's share price is $2. Both firms have 1 million shares outstanding. Big Fish expects a discounted synergistic value of $1 million from the merging of operations of the two firms. If Big Fish issues $2.2 million worth of shares to Little Fish's shareholders, what is the NPV of the acquisition? Round your answer to the nearest dollar.

$655,738

$144,262

$1,344,262

$823,524

$800,000

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Answer #1

NPV = PV of Synegy - [ Excess paid to Merged Company ]

= $ 1 M [ Purchase COnsideration - Value before Merger ]

= $ 1 M - [ $ 2.2 M - $ 2M ]

= $ 1M - $ 0.2M

= $ 0.8Mi.e $ 800,000

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