Question

Use the following information to answer the question. 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

a. How many shares of A, at their current price, will be given to firm B's stockholders in the stock-financed deal?

b. What will be the value of the post-merger firm if firm B's stockholders are paid in stock?

c. What will be the price per share of the post-merger firm if payment is made in stock?

d. What is the NPV of acquiring firm A when stock financing is used?

e. What will be the value of the post-merger firm following a cash acquisition?

f. What is the cost of acquisition when stock financing is used?

Answer 1

Ans Market Value of of firm A= 10000 x 25 = 25oooo Firm B - 10 000 X10 100 000 Add : 156oo synergy value Total Merged entity value $365000 q No. of shares of offered by Firm A= 78750 3150 shares 25 Percentage holding of Firm B in merged entity is 3150 shares 0.23954 times. (10000 + 3150 of Merged entity. NPV of acquiring firm A when stock finance is used. $365000.X 0.23954 (-) 78750 $8682 y shares shares A 2 78750 25 3uo shares. 5) No of given by Post merger firm value] alue} when paid in Stock 343750 10000+3150 10000 x 25+ 3150 x 25 + 15000 = $343750 c) price per share of post $26.14 meger firm (when paid in stock) d). NPV (as calculated above) = $8682 e) Post merger firm (when cash is paid) 0 10000 X 25 +10000X10 = $365000 f) Cost of merger $343750 x 0.2395 (whent paid in stock). E (7 672 $ tooo 100 Mo