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		5,000			1,600
Price per share	$	42		$	17

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,000.

a.	If Firm T is willing to be acquired for $19 per share in cash, what is the NPV of the merger?

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 $19 per share in cash, what is the merger premium?

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

Solution to part A:

NPV= Expected cash flows of the firm T (+) Synergy benefit (-) Amount that will be paid to the firm T

= {(1600*17)+9000} - (1600*19)

= $5,800

Solution to part B:

Price per share of the merged firm = (Value of firm B (+) Value of firm T (+) Synergy benefit)/ Number of outstanding shares in the merged firm

= [(5000*42)+(1600*17)+9000]/5000

= (210000+27200+9000)/5000

= $49.24

Solution to part C:

Merger Premium = Amount that will be paid to firm T (-) Market of firm T before merger

= (19-17)*1600

= $3,200

Merger premium per share = (19-17)/17*100 = 11.77%

Solution to part D:

Shares issued to firm T = 1 share of firm B for every 2 shares of firm T

Hence 1600 divided by 2, 800 shares of firm B is issued

Total Outstanding shares after merger = Exisiting shares (+) shares issued to firm T

= 5,000+800 = 5,800 shares

Price per share of the merged firm = (Value of firm B (+) Value of firm T (+) Synergy benefit)/ Number of outstanding shares in the merged firm

= [(5000*42)+(1600*17)+9000]/5800

= (210000+27200+9000)/5800

= $42.45

Solution to part E:

NPV= Expected cash flows of the firm T (+) Synergy benefit (-) Amount that will be paid to the firm T

= {(1600*17)+9000} - (800*42.45)

= $2,240