Firms a and B Intend to Merge and Firm a Has

question 20

Essay

Firms A and B intend to merge and Firm A has calculated the NPV of the merger to be $2 million after paying $8 million for Firm
B. If Firm A had a pre-merger value of $10 million and Firm B had a pre-merger value of $6 million, calculate the value of the merged entity, as well as the cost of the merger.
PV_AB = PV_A + PV_B + gain
= $10 million + $6 million + $4 million
= $20 million
Cost or merger = cash - PV_B
= $8 million - $6 million
= $2 million
NPV = $4 million - $2 million
= $2 million

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