Firm A is considering a merger/acquisition with Firm B. Based on the following d
ID: 2736647 • Letter: F
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 A share exchanges for 2.1332 B shares. b. 1.4286, that is, 1 B share exchanges for 1.4286 A shares. c. 1.4286, that is, 1 A share exchanges for 1.4286 B shares. d. 1.0156, that is, 1 A share exchanges for 1.0156 B shares. e. 2.1332, that is, 1 B share exchanges for 2.1332 A shares. f. 1.0156, that is, 1 B share exchanges for 1.0156 A shares.
Explanation / Answer
Answer:
Total firm value of A = $12 million
Total firm value of B = $15 million
Post merger value of combined firm =$ 27 million
Market value of debt of Firm A = $4 million
Market value of debt of Firm B = $6 million
Total market value debt of combined business = $10 million
Post merger value of Equity of combined firm = $(27-10) million
=$17 million
If all the synergy gain goes to Firm A's shareholders
Offered to Firm B = Premerger value of equity of Firm B
= $7 million
Value retained by Firm A = $(17-7) million
= $10 million
Value per share of Firm A = $(10/0.5) million
=$20 per share
Number of share allotted to Firm B = 7 million /20
=0.35 million
Exchange ratio = Existing share of Firm B / Shares allotted
=0.5/0.35
=1.4286
That is, 1 A share exchanges for 1.4286 B shares.
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