Firm a Has a Value of $100 Million, and B

question 5

Multiple Choice

Firm A has a value of $100 million, and B has a value of $70 million. Merging the two would allow a cost savings with a present value of $20 million. Firm A purchases B for $75 million. What is the cost of this merger?

• A) $30 million
• B) $20 million
• C) $5 million
• D) $10 million

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Definitions:

Inefficient Market

A market in which asset prices do not always accurately reflect all available information, potentially allowing investors to earn abnormal returns.

Maurice Kendall

Maurice Kendall was a British statistician known for his significant contributions to the field of statistics, including work in time series analysis and the development of the Kendall rank correlation coefficient.

Stock Returns

The gain or loss made from trading a stock, usually measured as the change in capital plus dividends in a given period.

EMH

The Efficient Market Hypothesis, a theory stating that stock prices fully reflect all available information, making it impossible to consistently achieve higher returns.