Question

Firm X is being acquired by Firm Y for $35,000 worth of Firm Y stock (valued at the pre-merger current price of Y). Both firms are all-equity financed. The incremental value created by the merger is $2,500. Firm X has 2,000 shares of stock outstanding at $16 per share. Firm Y has 1,200 shares of stock outstanding at a price of $40 per share. What is the actual cost of the acquisition to Firm Y using company stock? Why is the actual cost less than $35,000?

Answer 1

Calculation of actual cost of acquisition to firm Y using common stock
No of shares issued to firm X	35000/40
No of shares issued to firm X	875
Calculation of value of share of firm Y after merger
Value of share after acquisition	(Value of firm X+Value of firm Y+Value created)/No of shares outstanding after merger
Value of share after acquisition	((1200*40)+(2000*16)+2500)/(1200+875)
Value of share after acquisition	$39.76
Actual cost of acquisition	875*39.76
Actual cost of acquisition	$34,789.16
The actual cost of acquisition is $34,789.16.
The actual cost of acquisition is less than $35,000 this is since the value of shares of firm Y has decreased after merger and thus the cost of acquisition is lower.