Firm A is considering a merger with Firm B. Based on the following data, what is
ID: 2736465 • Letter: F
Question
Firm A is considering a merger 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 B's shareholders?
Firm A:
Market value of debt: $2 million
Market value of equity: $4.5 million
Number of shares: 0.2 million
Estimated total firm value based on value-based management model: 8 million
Firm B:
Market value of debt: $5 million
Market value of equity: $7 million
Number of shares: 0.5 million
Estimated total firm value based on value-based management model: 13 million
Select one:
a. 2.3112, that is, 1 B share exchanges for 2.3112 A shares.
b. 0.5578, that is, 1 A share exchanges for 0.5578 B shares.
c. 1.1842 that is, 1 A share exchanges for 1.1842 B shares.
d. 2.3112, that is, 1 A share exchanges for 2.3112 B shares.
e. 1.1842, that is, 1 B share exchanges for 1.1842 A shares.
f. 0.5578, that is, 1 B share exchanges for 0.5578 A shares.
Explanation / Answer
Market value Equity of Firm A =$4,500,000
No of Shares of Firm A=200,000
Value per share for Firm A=Total Value/No of shares=$4,500,000/200,000=$22.5
Given in Problem:what is the stock exchange ratio if Firm A negotiates a merger with Firm B and if all the synergy gain goes to Firm B's shareholders
so
Total value of both firms=$8,000,000+$13,000,000=$21,000,000
Value of Equity firm B=Total value of both firms-Debt of both firms-Equity value firm A=$21 million-$2 million-$5 million-$4.5 million=$9.5 million
No of Shares of Firm B=500,000
Value per share for Firm B=Total Value/No of shares=$9,500,000/500,000=$$19
so Exchange Ratio=Value per share of Firm A/Value per share of Firm B=$22.5/$19=1.1842 shares
c. 1.1842 that is, 1 A share exchanges for 1.1842 B shares.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.