the market price of company A is $200 million and that of B is $100 million....

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

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Expert Solution

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

Market value of A = Total Market value / Number of shares

= $200 Million / 1 million = $200 per share.

Market value of B = $100 / 0.5 million = $200 per share.

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

Cost of merger to firm A = $65 million.

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.

NPV of merged firm = Present value of future benefit - Present value of cost

= $25 million - $65 million

= -$40 million.

Merger is not beneficial.

jeff jeffy answered 6 months ago

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