Question

Use the following information to answer the questions. Round your answers if necessary, to two decimal places. Firm A can acquire firm B for $78,750 in cash or with stock worth $78,750 priced at its current price of $25 per share of stock. The synergy value of the deal is $15,000. Both firms are 100% equity financed. Firm A: Number of Shares = 10,000 ; Price per Share - $25.00 Firm B: Number of Shares = 10,000; Price per Share = $10.00 What will be the value of the post-merger firm following a cash acquisition? O A) $261,250 OB) $262,500 OC) $337,500 D) $650,000 E) None of the above

Answer 1

The correct option is :- (E) None of the above

Explanations and calculations

Value of Firm = Number of share * share price

so

The Value of firm A (before acquisition) = 10000* $ 25 = $250000

The Value of firm B (before acquisition) = 10000*10 = $ 100000

The synergy value of deal = $15000

Consideration is paid in cash acquisition = $ 78750 (paid in cash)

So the value of post merger firm following a cash acquisition will be as follows

Value of post merger firm = Value of firm A + Value of firm B + Synergy value - cash consideration paid

Value of post merger firm= $25000+$100000+$15000-$78750

Value of post merger firm= $365000-$78750

Value of post merger firm= $286250