Shareholders in firm B are paid the market value of their firm
in shares of stock from firm A. The earnings of the combined firm
are $68,000. Information on each firm, prior to merger is as
follows:
Firm A | Firm B | |
Number of outstanding shares | 30000 | 22000 |
Price per share | $32.00 | $25.00 |
Debt | $0 | $0 |
Total earnings | $36,000.00 | $30,000.00 |
What is the net present value of acquiring firm B in an all stock
merger?
Multiple Choice
$6,375
$17,188
$9,533
$13,221
$10,000
value of synergy = $ 2,000 ( 68000-36000-30000)
EPS
firm A = 36000 / 30000 = $ 1.2
firm B = 30000 / 22000 = $ 1.36
PE ratio
firm A = 32 / 1.2 = 26.6
firm B = 25 / 1.36 = 18.38
multiple of earnings to price
firm A= 100/26.6 = 3.76
firm B= 100/ 18.3 = 5.46
assume synergies value is $ 10,000 (2,000 * 5)
Value A = 32 * 30000 = $ 960,000
Value B = 25 * 22000 = $ 550,000
V B * = $ 550,000 + 10,000 = $ 560,000
A must sell stock at the current market price of $ 32 . Firm A needs to issue
550,000 / 32 = 17,188 shares
after the merger there will be 30,000 + 17, 188 = 47,188 shares
price per share will be
( 960,000+560,000+10,000)/47,188 = 32.21
price paid = 560,000 - 17,188 * 32.21 = $ 6374.5 or $ 6375.
Shareholders in firm B are paid the market value of their firm in shares of stock...
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