Question

Consider the following pre-merger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding.

	Firm B	Firm T
Shares Outstanding	8,700	3,600
Price per Share	$47	$19

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $16,700. Suppose Firm B agrees to a merger by an exchange of stock. If B offers one of its shares for every 2 of T's shares.

What will be the price per share of the merged firm?

		$46.58
		$48.14
		$48.09
		$47.05

Answer 1

Value of share merged firm

=

(Market valueof firm B+market value of Firm t+synergies effect)/Total no.of share ofmerged firm

Market value of firm

=

No. of shares * total sharesoutstanding

Market value of firm B

=

$47*8700

=

$ 408,900.00

Market value of firm B

=

$19*3600

=

$    68,400.00

Synergies effect

=

$16,700

No. of shares of merged firm

=

Shares of firm B+new shares issued on merger

New share sissued on merger

=

Shares of firm T * exchange ratio

=

3600*1/2

=

1800

No. of shares of merged firm

=

8700+1800

=

10500

Value of share merged firm

=

($408,900+$68400+$16700)/10,500

=

494000/10500

=

47.05

The answer is $47.05

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