Question

1. Firm A has 100 shares, worth $10 each. Firm B has 80 shares with $15 each. If there is synergy of $200 for a merger and firm A intends to keep half of the synergy to itself, what is the debt ratio of the combined company if it is an all-cash offer? Assume neither has cash or debt pre-merger. 2. Firm A has 100 shares, worth $11 each. Firm B has 80 shares with $15 each. If there is no synergy, how much cash per share firm A should offer to firm B to ensure that the new company is equally owned by both firms?

Answer 1

CALCULATION OF PRICE OFFERED BY FIRM A TO FIRM B IN CASE OF SYNERGY

VALUE OF FIRM B =80X15=1200

SYNERGY GIVEN BY A (200/2)=100

TOTAL CASH OFFERED BY FIRM A=1300

SO DEBT INCREASE BY 1300( BECAUSE no cash available).

EQUITY HELD BY A=100X10=1000

VALUE OF SYNERGY HELD BY A =100

TOTAL EQUITY =1100

DEBT RATIO= DEBT/DEBT+EQUITY

= 1300/1300+1100

= 0.54166

SECOND PART

TOTAL VALUE OF BOTH FIRM

VALUE OF FIRM A=100X11=1100

VALUE OF FIRM B=80X15=1200

TOTAL VALUE =2300

IT SHOULD BE DIVIDED EQUALLY

SO VALUE GIVEN TO FIRM B SHOULD BE=2300/2=1150

CASH PER SHARE =VALUE/NO. OF SHARE

=1150/80

= =14.75

SO 14.75 cash per share firm A should offer to firm B