Firm A is planning on merging with Firm B. Firm A currently has 2300 shares of s

Question

Firm A is planning on merging with Firm B. Firm A currently has 2300 shares of stock outstanding at a market price of $20 a share. Firm B has 750 shares outstanding at a price of $15 a share. The merger will create $200 of synergy. How many of its shares should Firm A offer in exchange for all of Firm B's share if it wants its acquisition cost to be $12.000? O 598 607 O 600 584 593

Explanation / Answer

Particulars A B No. of shares 2,300 750 Share price $20 $15 Synergy $200 Acquisition cost $20,000 Market value = no. of shares x share price $46,000 $11,250 Merged firm value = Mkt value of A and B + Synergy $57,450 Let 'a' be the proportion of shares that Firm Bownes in the combined firm a x Merged firm value = Acquisition cost = $12,000-->a= Acquisition cost/Merged firm value= 0.2089 a = number of new shares issued to B/(number of old shares of firm A + number of new shares issued to B) = 0.2089. Let X be the number of new shares issued to B, we have X/(X + 2,300) = 0.2089 Solve for X = 607

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