Question

Lenix is planning on merging with Kelly Company. Lenix currently has 80,000 shares of stock outstanding at a market price of $31.50 a share. Kelly Company has 52,000 shares outstanding at a price of $26.00 a share. The merger will create $440,000 of synergy. How many of its shares should Lenix offer in exchange for all of Kelly Company share if it wants its acquisition cost to be $1,450,000?

40,117

40,316

40,425

40,531

40,682

Answer 1

Market Value of merged firm = Market Value of Lenix (before merger) + Market Value of kelly (before merger) + synergy benefit
= (80,000 * $31.50) + (52,000 * $26) + $440,000
= $2,520,000 + $1,352,000 + $440,000
= $4,312,000

Net value of firm after acquisition = Market Value of merged firm - Acquisition cost
= $4,312,000 - $1,450,000
= $2,862,000

Value per share of merged firm = Net value of firm after acquisition / Number of shares existing shareholders hold
= $2,862,000 / 80,000
= $35.775

Number of shares Lenix should offer to Kelly shareholders = $1,450,000 / $35.775 = 40,531

Number of shares Lenix should offer to Kelly shareholders = 40,531