10. Firm A is considering acquiring Firm B. There are 1,000 shares of Firm A sto
ID: 2767948 • Letter: 1
Question
10. Firm A is considering acquiring Firm B. There are 1,000 shares of Firm A stock outstanding and 600 shares of Firm B stock outstanding. Both firms agree on the following data:
PVA = 2,000
PVB = 600
PVAB= 3,000
(a) [5 points] What is the total synergy gain from this merger?
(b) [5 points] What is the highest amount of cash that Firm A would be willing to pay to acquire Firm B in a cash acquisition?
(c) [5 points] What is the highest number of shares that Firm A would be willing to pay to acquire Firm B in a stock acquisition?
Explanation / Answer
Present value of A = $2,000
Present value of B = $600
Present value of A and B = $3,000
a.
Value of synergy = Present value of A and B - Present value of A - Present value of B
= $3,000 - $2,000 - $600
= $400
Hence, Value of synergy is $400.
b.
Highest amount of cash that Firm A would be willing to pay to acquire Firm B in a cash acquisition is the value of synergy. Thus Highest amount of cash that Firm A would be willing to pay to acquire Firm B in a cash acquisition is $600.
c.
Highest number of shares that Firm A would be willing to pay to acquire Firm B in a stock acquisition 600 stocks.
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