Question

Below find the average cost information for two companies
	Assets ($M)	Average Cost (%)
Company 1	250	15
Company 2	325	22
Company 3	350	18
Company 2 is looking to acquire Company 1 & 3

If Company 2 reduces its operating costs by $40M after the merger, what will the average cost of the new company be?

Answer 1

Solution :-

Average Cost of Company 1 = $250 * 15% = $37.50

Average Cost of Company 2 = $325 * 22% = $71.50

Average Cost of Company 3 = $350 * 18% = $63.00

Now If Company 2 acquire Company 1 and 3

Then total Assets of New Company = $250 + $325 + $350 = $925

Total Average Cost of New Company = [  $37.50 + $71.50 + $63.00 ] - $40 = $132

Now Average Cost of New Company ( % ) = $132 / $925 = 14.27%

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