Question

Consider the following pre-merger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B Firm T Shares Outstanding 8,700 3,600 Price per Share $47 $19 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $16,700. If Firm T is willing to be acquired for $21 per share in cash, what is the NPV of the merger?

$3,600

$2,400

8,700

$9,500

Answer 1

Answer :

We need to find the Net Present Value ( NPV ) of the merger. Firm B is the bidding firm and Firm T is the target firm. The NPV is calculated by subtracting the cost to acquire the target firm from the value of the target firm to the bidding firm.

Given data :

	Firm B	Firm T
Shares outstanding	8,700	3,600
Price per share	$47	$19

First , we need to calculate the value of the target firm.

Value of firm T = Value of synergistic benefits + Market value of firm T

= $16,700 + $19 x 3,600

= $85,100

We know that Firm T is willing to be acquired for $21 per share. So, the NPV of the merger is :

NPV = Value of firm T - Cost of acquisition

= $85,100 - $21 x 3,600

= $9,500

The NPV of merger is $9,500.