In: Finance
the market price of company A is $200 million and that of B is $100 million. the number of shares of company A is 1 million and that of B is 500,000. Merging two firms will allow for cost savings with a present value of $25million. Firm A has decided to pay $ 65million to acquire B. A. What is the market value of A B. what is the market value of B C. what is the gains from synergies D. Compute the cost of merger to firm A E. What is the benefit of merger to firm A F. what is the NPV of the merger
Total Market value of company A = $200 million
Total Market value of company B = $100 million
Total No of shares of company A = 1 million
Total No of shares of company B = 0.5 million
A.
Market value of A = Total Market value / Number of shares
= $200 Million / 1 million = $200 per share.
B.
Market value of B = $100 / 0.5 million = $200 per share.
C.
Total Gain from synergies = Total market value of merged firm - Total value of individual firms
Total value of merged firms = $200 + $100 + $25 = $325
Total Value of individual firms = $200 + $100 = $300
Total Gain = $325 - $300 = $25 million
D.
Cost of merger to firm A = $65 million.
E.
Benefit of merger to firm A = Total market value of the merged firm / Total number of shares
= $325 million / 1 million
= $325 per share.
Firm A value increase from $200 per share to $325 per share.
F.
NPV of merged firm = Present value of future benefit - Present value of cost
= $25 million - $65 million
= -$40 million.
Merger is not beneficial.