Firm A has a value of $500 million and Firm B has a value of
$300 million. Firm A has 1000 shares outstanding, and Firm B has
800 shares outstanding. Suppose that the merger would increase cash
flows of the combined firm by $5 million in perpetuity. Assuming
the cost of capital for the new firm is 5%.
Suppose that instead of paying cash, Firm A acquires B by offering
two (new) shares of A for every three shares of B. The net gain to
Firm A's shareholders is around:
A. |
$30 million |
|
B. |
$10 million |
|
C. |
$70 million |
|
D. |
$87 million |
|
E. |
None of the above |
Firm A has a value: $500 million
Firm B has a value: $300 million
Firm A has 1000 shares outstandingand Firm B has 1000 shares outstanding. Firm A acquires B by offering two (new) shares of A for every three shares of B.
Hence, total shares issued to shareholders of B: 1000*2/3 = 667shares and total shares after merger are 1000 + 667 = 1667 shares.
Merger would increase cash flows of the combined firm by $5
million in perpetuity and the cost of capital for the new firm is
10%.
Hence, value of synergy gain from merger is $5 million/0.10 = $50
millions.
The net gain to Firm A's shareholders is: value of shares after merger - value of shares before merger
The net gain to Firm A's shareholders is:[(500+300+50)*1000/1667] - 500
The net gain to Firm A's shareholders is: $509.89 million - $500 million = 9.89 million or 10 million approximately.
Correct option is : B 10 million
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