Question

Firm B's 1 million shares of stock currently sell for $12 each, but firm A is preparing a tender offer of $18 per share. Firm A estimates the NPV of the merger to be $5 million. What percentage of the merger gains will be captured by firm B's stockholders?

Multiple Choice

• 54.55%

• 33.33%

• 50.00%

• 66.67%

Answer 1

Solution:
	Answer is 1st option 54.55%
Working Notes:
	Percentage of the merger gains will be captured by firm B's stockholders
	= Gain captured by firm's B shareholders / Overall gain due to merger
	Gain captured by firm's B shareholders
	= Value paid by Firm A to shareholders of Firm B - Actual value of Firm B
	Value paid by Firm A to shareholders of Firm B
	= No of shares x tender offer price
	=1 million x $18
	=$18 million
	Actual value of Firm B
	= No of shares x current selling price
	= 1 million x $12
	=$12 million
	Gain captured by firm's B shareholders
	= Value paid by Firm A to shareholders of Firm B - Actual value of Firm B
	=$18 million - $12 million
	=$6 million
	Firm A estimates the NPV of the merger to be $5 million means NPV for Firm A
	NPV of merger for Firm A = Overall gain of merger - Gain captured by firm's B shareholders
	$5 million = Overall gain of merger - $6 million
	Overall gain of merger = $5 million + $6 million
	Overall gain of merger = $11 million
	Percentage of the merger gains will be captured by firm B's stockholders
	= Gain captured by firm's B shareholders / Overall gain due to merger
	= $6 million / $11 million
	=0.545454
	=0.5455
	=54.55%
Please feel free to ask if anything about above solution in comment section of the question.