Question

Firm A has a value of $500 million and Firm B has a value of $300...

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 1000 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 10%.

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 closest to:

A. $0

B. $10 million

C. $20 million

D. $87 million

E. None of the above

Homework Answers

Answer #1

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: 10002/3 = 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

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Firm A has a value of $500 million and Firm B has a value of $300...
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...
Firm A has a value of $500 million and Firm B has a value of $300...
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%. Assume that Firm A purchases Firm B for $330 million. How much do Firm A's shareholders gain from this merger? A. $30...
QUESTION 18 Firm A has a value of $500 million and Firm B has a value...
QUESTION 18 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%. Assume that Firm A purchases Firm B for $330 million. How much do Firm A's shareholders gain from this merger?...
Firm A has a value of $500 million and Firm B has a value of $300...
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%. If Firm A purchases Firm B for $330 million, how much do Firm B's shareholders gain from this merger? A. $30 million...
Firm A is considering a merger/acquisition with Firm B. Based on the following data, what is...
Firm A is considering a merger/acquisition with Firm B. Based on the following data, what is the stock exchange ratio if Firm A negotiates a merger with Firm B and if all the synergy gain goes to Firm A's shareholders? Firm A: Market value of debt: $4 million Market value of equity: $6 million Number of shares: 0.5 million Estimated total firm value based on value-based management model if the merger takes place: 12 million Firm B: Market value of...
Consider the following premerger information about Firm X and Firm Y: Firm X Firm Y   Total...
Consider the following premerger information about Firm X and Firm Y: Firm X Firm Y   Total earnings $ 78,000 $ 13,500   Shares outstanding 35,000 10,000   Per-share values:      Market $ 50 $ 15      Book $ 10 $ 5 Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $7 per share, and that neither firm has any debt before or after the merger. List the assets of the combined firm assuming...
Consider the following premerger information about Firm X and Firm Y: Firm X Firm Y   Total...
Consider the following premerger information about Firm X and Firm Y: Firm X Firm Y   Total earnings $ 97,000 $ 23,000   Shares outstanding 54,000 19,000   Per-share values:      Market $ 54 $ 16      Book $ 13 $ 5 Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $4 per share, and that neither firm has any debt before or after the merger. List the assets of the combined firm assuming...
Consider the following premerger information about Firm X and Firm Y: Firm X Firm Y   Total...
Consider the following premerger information about Firm X and Firm Y: Firm X Firm Y   Total earnings $ 93,000 $ 21,000   Shares outstanding 50,000 15,000   Per-share values:      Market $ 50 $ 21      Book $ 17 $ 8 Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $8 per share, and that neither firm has any debt before or after the merger. List the assets of the combined firm assuming...
Firm A is acquiring Firm B. Firm A’s share price is $12 and Firm B's share...
Firm A is acquiring Firm B. Firm A’s share price is $12 and Firm B's share price is $4. Both firms have 1 million shares outstanding. Firm A expects a discounted synergistic value of $2 million from the merger. If Firm A pays $5 million cash to Firm B's shareholders, what is the NPV of the acquisition?
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...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT