Firms a and B, Both of Which Are 100% Equity

question 48

Essay

Firms A and B, both of which are 100% equity, are going to merge. Before the merger, Firm A (100 shares outstanding) is worth $15,000. Firm B (50 shares outstanding) is worth $10,000. The combined firm is worth $30,000. Firm A will pay $11,500 in cash for Firm
B. What is the NPV of the merger to Firm A?
Synergy = $30,000 - 15,000 - 10,000 = 5,000
NPV = Synergy - Premium = $5,000 - 1,500 = $3,500.
Value of Firm A After the Acquisition: $30,000 - 11,500 = $18,500
NPV to Firm A = $18,500 - 15,000 = $3,500

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