Question

Mariners is planning on merging with Red Sox. Mariners currently has 75,000 shares of stock outstanding at a market price of $46.50 a share. Red Sox has 39,000 shares outstanding at a price of $27.20 a share. The merger will create $247,000 of synergy. How many of its shares should Mariners offer in exchange for all of Red Sox s share if it wants its acquisition cost to be $1,142,000?

		22,608
		22,891
		23,445
		23,714
		24,015

Answer 1

Ans:- To find the number of shares that Mariners should offer in exchange for all of Red Sox share if it wants its acquisition cost to be $1,142,000, first we need to find the Net Present Value of acquiring firm i.e Red Sox.

Net Present Value of Red Sox will be given by

(Current Market Value of Red Sox firm + Synergy Value - Acquisition cost )

= (39000 * 27.20 + 247000 - 1142000) = 165800.

Note: - Current Market Value = No of outstanding shares * Price of share.

Now we need to find the price of the shares of the Mariners group post-merger.

Therefore the share price post-merger will be

( Current Market value of Mariners + NPV of Red Sox ) / No of shares of Mariners group.

( 75000 * 46.50 + 165800)/75000 = 48.71.

The number of shares that Mariners should offer will be given by (Acquisition cost / Price of share post-merger)

( 1142000/48.71) = 23444.87 =23445.

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