Question

In: Finance

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.


Related Solutions

Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million...
Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding, with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one-time dividend . a. What is the ex-dividend price of a share in a perfect capital market? b. If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market what is the price...
A firm with no debt financing has a firm value of $50 million. It has a...
A firm with no debt financing has a firm value of $50 million. It has a corporate marginal tax rate of 35 percent. The firm’s investors are estimated to have marginal tax rates of 22 percent on interest income and a weighted average of 17 percent on stock income. The firm is planning to change its capital structure by issuing $10 million in debt, and repurchasing $10 million of common stock. Based on the information above, answer next 2 questions....
An unlevered firm has a value of $900 million. An otherwise identical but levered firm has...
An unlevered firm has a value of $900 million. An otherwise identical but levered firm has $70 million in debt at a 4% interest rate, which is its pre-tax cost of debt. Its unlevered cost of equity is 11%. After Year 1, free cash flows and tax savings are expected to grow at a constant rate of 3%. Assuming the corporate tax rate is 25%, use the compressed adjusted present value model to determine the value of the levered firm....
Nonlinear Alchemy has a market value of $9 Billion. It has 300 Million shares outstanding and...
Nonlinear Alchemy has a market value of $9 Billion. It has 300 Million shares outstanding and holds $3 Billion in cash and other short term investments. Markets are efficient and there are no taxes. a) What is the share price? Suppose that Nonlinear wants to pay out all its cash as a special dividend next year. b) What is the special dividend per share? c) What is the ex-dividend share price? Suppose Nonlinear repurchases shares for $3B instead. d) What...
The Imaginary Products Co. currently has debt with a market value of $300 million outstanding. The...
The Imaginary Products Co. currently has debt with a market value of $300 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $915.93 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $29. The preferred shares pay an annual dividend of $1.20. Imaginary also has 14 million shares of common stock outstanding with a...
The Imaginary Products Co. currently has debt with a market value of $300 million outstanding. The...
The Imaginary Products Co. currently has debt with a market value of $300 million outstanding. The debt consists of 10 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,440.03 per bond. The firm also has an issue of 4 million preferred shares outstanding with a market price of $14.00 per share. The preferred shares pay an annual dividend of $1.20. Imaginary also has 12 million shares of common stock outstanding...
The Cullumber Products Co. currently has debt with a market value of $300 million outstanding. The...
The Cullumber Products Co. currently has debt with a market value of $300 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,429.26 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $20 per share. The preferred shares pay an annual dividend of $1.20. Cullumber also has 14 million shares of common stock outstanding...
Suppose firm XYZ has AR (Accounts Receivable) = 500, Sales = 3000, Inventory = 300, Cost...
Suppose firm XYZ has AR (Accounts Receivable) = 500, Sales = 3000, Inventory = 300, Cost of Goods Sold = 1200, and AP (Accounts Payable) = 100. How much cash does firm XYZ save if it reduces its Days Sales Outstanding by 10 days? What are specific activities an organization can engage in to accomplish these goals?
Firm B has an EBIT of $2.4 million. Total capital is $50 million and the capital...
Firm B has an EBIT of $2.4 million. Total capital is $50 million and the capital structure is composed of 40% debt and 60% equity. If the firm’s tax rate is 30%, and the cost of the firm’s debt is 4.5%, what is the Net Income of Firm B? $1050 $105 $735 $780 2. Firm C has an EBIT of $4.8 million, a cost of debt of 3.5% on $40 million in debt and a tax rate of 21%. If...
Gentry Inc. is a mid-sized tech firm (200 employees and $300 million in revenue) and has...
Gentry Inc. is a mid-sized tech firm (200 employees and $300 million in revenue) and has been privately held since the firm’s inception ten years ago. The organization’s board of directors is keen on expanding the operations globally to take advantage of a growing market. Based on reports from the research and development team, the organization can increase its profitability metrics by 15 to 25% if it expands the operations to China, Japan, and Germany. Becoming a multinational organization will...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT