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A Corporation has been in merger talks with B Company. After the merger, B will become...

A Corporation has been in merger talks with B Company. After the merger, B will become a division of A. Jack, the financial officer at A, has been instrumental in the negotiations. Both companies believe a merger will result in significant synergies due to economies of scale in manufacturing and marketing, as well as savings in general and administrative expenses. Stocks in A currently sell for $94 per share, and the company has 11 million shares of stock outstanding. The management of A feels that the capital structure at B is not optimal. If the merger takes place, B will immediately increase its leverage and make its debt-equity ratio to be 1. Taking synergy value into account, Jack estimates that the total firm value (debt and equity) of B right after merger would be $811.2 million, and B has 5.2 million shares of stock outstanding.

a. Suppose the shareholders of B agree to a cash offer of $58 per share. What is A’s market value of equity after merger?

b. Suppose A chooses to pay stocks for the merger. A Corporation issues and offers one of its shares for every two of B’s shares. What is the NPV of this stock merger?

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