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

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

Answer 1

Solution:

Calculation of cost of acquisition:

=Value of stock issued-Value of Firm B

=$78,750-($10,000*10)

=-$21,250