Firm A has a value of $500 million and Firm B has a value of $300...

Firm A has a value of $500 million and Firm B has a value of $300 million. Firm A has 1000 shares outstanding, and firm B has 1000 shares outstanding. Suppose that the merger would increase cash flows of the combined firm by $5 million in perpetuity. Assuming the cost of capital for the firm is 10% Suppose that instead of paying cash, Firm A acquires B by offering two (new) shares of A for every three shares of B.

The net gain to Firm A's shareholders is closed to A. $0 B. $10 million C. $20 million D. $87 million E. none of the above

Solutions

Expert Solution

Net gain to the shareholders of Firm "A"=Nil

Option A is correct

Please find the elaborate answer below:

Hence option A is correct.

jeff jeffy answered 1 year ago

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