Question

Consider the following premerger 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		5,800			1,300
Price per share		$45			$16

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,400.

a. If Firm T is willing to be acquired for $18 per share in cash, what is the NPV of the merger? (Do not round intermediate calculations.)

NPV           $

b. What will the price per share of the merged firm be assuming the conditions in (a)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Share price           $

c. If Firm T is willing to be acquired for $18 per share in cash, what is the merger premium? (Do not round intermediate calculations.)

Merger premium           $

d. Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its shares for every two of T's shares, what will the price per share of the merged firm be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Price per share           $

e. What is the NPV of the merger assuming the conditions in (d)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV           $

Answer 1

1. NPV of the merger if Firm T is acquired for $ 18 per share
   = No. of shares of T *(Market price) - No. of shares of T *(Acquisition price) + Synergy
   = 1300*16 – 1300* 18 + 9400
   = $ 6,800
   
2. Price per share of the merged firm
   = Total Value of the merged firm / Total number of shares
   = 267,800 / 5800
   = 46.17 (Rounded off upto two decimal places)
   
   Where,
   Total value of the merged firm
   = (No. of shares of B*(Market Price) + Net present value of acquisition)
   = (5800*45) + 6800
   = 261,000 + 6800
   = $ 267,800
   
   Total Number of shares = 5800
   
3. Merger premium for the merger is the amount which is paid extra from the market value
   
   Merger Premium = No. of shares of Firm T ( Acquisition price – Market price of T)
   Merger Premium = 1300 * ( 18 – 16)
   Merger Premium = $ 2,600
   
4. Total Number of shares = 1300 * (1/2) = 650 shares
   So 650 shares are given by firm B to Firm T in exchange of the firm Acquisition.
   
   Therefore Price of the merged firm would be:
   = Total Value of the merged firm / Total number of shares
   = 291200 / 6450
   = 45.15 ( rounded off upto two decimal places)
   
   Value of the merged firm
   = No. of shares of B * Market Price + No. of shares of T* Market price + Synergy
   = 5800*45 + 1300*16 +9400
   = 261000 + 20800 + 9400
   = $ 291,200
   
   Total Number of shares = Shares of B + Shares newly issued to Firm T of Firm B
   Total Number of shares = 5800 + 650 = 6450 shares.
   
5. Net Present Value of the merger in (d) above
   = No. of shares of Firm T* Market price + Synergy – Share price of merged firm * No. of shares newly issued.
   = (1300*16) + 9400 – 45.15*650
   = 20800+9400 – 29345.74
   = $ 854.26.