Question

Firm A (acquirer) has 100 shares, worth $10 each. Firm B (target) has 100 shares with $12 each. If there is a synergy of $200 for a merger of the two and firm A intends to keep half of it, what is the number of shares of firm A to be exchanged for each of firm B’s shares?

Answer 1

> Formula

Exchange Ratio = Offer Price for Target’s Shares / Acquirer’s Share Price

> Calculation

Particulars	Calculation	Amount
Target market price per share		12
Add: Synergy benefit per share	[200/2] / 100 shares	1
Offer Price		13
Divide: Acquirer Share price		10
Exchange ratio		1.3

For every 1 share of Firm B, 1.3 shares of Firm A.

Total number of shares = 100 Shares * 1.3

                                  = 1300 shares of Firm A   Answer

Hope you understand the solution.