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Firm C has a market value of $500 million and the stock is trading at $25...

Firm C has a market value of $500 million and the stock is trading at $25 per share. Firm D has a market value of $100 million and the stock is trading at $50 each. Firm C is contemplating acquiring firm D. Firm C’s CFO estimates that the combined firm will be worth $750 million and firm D can be acquired at an acquisition premium of $95 million.

  1. If for the outstanding shares of firm D, firm C is willing to offer its 5 million shares to exchange in this acquisition, what will be the post-acquisition stock price of the merged firm?
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Answer #1

Shares of firm C = Market value/Price per share

= 500 million/25

= 20 million

Post acquisition price = Market value of combined firm/Total shares in combined firm

= 750 million/(20 million + 5 million)

=$30 per share

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