Firm A is considering a merger/acquisition with Firm B. Based on the following d

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: 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: 15 million

Select one:

a. 2.1332, that is, 1 B share exchanges for 2.1332 A shares.

b. 1.0156, that is, 1 A share exchanges for 1.0156 B shares.

c. 1.4286, that is, 1 A share exchanges for 1.4286 B shares.

d. 2.1332, that is, 1 A share exchanges for 2.1332 B shares.

e. 1.4286, that is, 1 B share exchanges for 1.4286 A shares.

f. 1.0156, that is, 1 B share exchanges for 1.0156 A shares.

Explanation / Answer

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

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 A's shareholders

so

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

Value of Equity 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=500,000

Value per share for Firm A=Total Value/No of shares=$1,000,000/500,000=$20

so Exchange Ratio=Value per share of Firm A/Value per share of Firm B=$20/$14=1.4286 shares

c. 1.4286, that is, 1 A share exchanges for 1.4286 B shares.

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