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Firm A is being acquired by Firm B for $24,000 cash. The synergy of the acquisition...

Firm A is being acquired by Firm B for $24,000 cash. The synergy of the acquisition is $3,500. Firm A has 1,500 shares of stock outstanding at a price of $15 a share. Firm B has 1,200 shares of stock outstanding at a price of $30 a share. What is the NPV for Firm A and Firm B shareholders?

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Answer #1

Value of firm A=Number of shares * price/ share = 1500 shares * $15/share= $ 22500

Cash received by firm A= $ 24000

Hence NPV for Firm A shareholders =cash received- value of shares = $(24000-22500)=$ 1500

Value of Firm B before acquisition= Number of shares * price/ share=1200 shares * $ 30/ share =$ 36000

Value of Firm B after acquisition= value before acquisition + value of firm A+ Synergy-cash paid to firm A= $(36000+22500+3500-24000) =$38000

NPV to firm B shareholders= Value of Firm B after acquisition -Value of Firm B before acquisition= $ 38000-36000 =$ 2000

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