Question

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 debt: $6 million

Market value of equity: $7 million

Number of shares: 0.5 million

Estimated total firm value based on value-based management model if the merger takes place: 15 million

Answer 1

Market value Equity of Firm B =$7,000,000

No of Shares of Firm B=500,000

Value per share for Firm B=Total Value/No of shares=$7,000,000/500,000=$14

"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"

Total value of both firms=$12,000,000+$15,000,000=$27,000,000

Value of Equity of firm A=Total value of both firms-Debt of both firms-Equity value firm B

=$27 million-$4 million-$6 million-$7 million=$10 million

No of Shares of Firm A=5,00,000

Value per share for Firm A=Total Value/No of shares=$10,000,000/500,000=$20

Exchange Ratio=Value per share of Firm B/Value per share of Firm A=$14/$20 = 0.7 shares