Question

Firm A is considering a merger/acquisition with Firm B.

Firm A:

Market value of debt: $2 million

Market value of equity: $4 million

Number of shares: 200,000

Firm B:

Market value of debt: $5 million

Market value of equity: $5 million

Number of shares: 500,000

Investment rate for the combined firm (bA+B): 70%

WACC for the combined firm (WACCA+B): 10%

Total net operating income before synergy gain: (X): $3 million

Synergy rate (a): 15%

Corporate tax rate (T): 40%

Growth rate for the combined firm (g): 14.4%

Number of years for the growth: 10

According to the Weston/Copeland model, what is the total synergy gain from the merger?

Select one:

a. $29.22 million

b. $30.09 million

c. $33.67 million

d. $26.81 million

Answer 1

Introduction :- The problem is related to mergers and acquisitions where A acquires B or B Merges with A. In the above Problem they have provided details :-

Market Value of Shares (Value of each share) --Firm B	5000000/500000=$10
Market Value of debt---Firm B	$5000000
Market Value of Shares-- Firm A	$20
Market Value of debt---Firm A	$2000000
Investment rate combined A+B	70%
WACC Combined	10%
Growth Rate	14.4%

The net operating income before synergy gain is $3000000

Net Operating Income	3000000
Add Synergy	450000
Net operating income after synergy gain	3450000
Minus Corporate Tax	1380000

Net Operating Income After Synergy gain and Tax 2070000

The growth rate for the combined firm (g)=14.4% and N=10 Years

Since A has acquired B because the share value of A is more than B 20>10 hence the share value will increase be $20 for both A and B. Hence the total synergy gain will be $26.81 million