I need part B answered only Part A Two physical therapy firms want to merge. The
ID: 1163876 • Letter: I
Question
I need part B answered only
Part A
Two physical therapy firms want to merge. The price elasticity of demand for physical therapy is -0.40. Firm A has a volume of 10,400, fixed costs of $50,000, marginal costs of $20, and a market share of 8 percent. Firm B has a volume of 15,600, fixed costs of $60,000, marginal costs of $20, and a market share of 12 percent. The merged firm has a volume of 26,000, fixed costs of $100,000, marginal costs of $20, and a market share of 20 percent.
A.What are the total costs, prices, revenues, and profits for each firm and for the merged firm? See the table .
B.How does the merger affect markups and profits?
Q
MC
FC
TC
Share
Market ?
FIRM ?
Price
Revenue
Profit
APT
10,400
$20
$50,000
8%
-0.4
BPT
15,600
$20
$60,000
12%
-0.4
Merged
26,000
$20
$100,000
20%
-0.4
HINT: total cost = fixed cost (FC) + variable cost ( i.e. VC or MC-per unit incremental cost)* Number of Units ( i.e. Quantity or Q)
You were provided the Market elasticity. How would you find the Firm elasticity? Firm e= Market e / Firm share in the market
Part B
A local hospital offered to buy Firm A in Exercise 7 for $5,000, and the offer was refused. However, many observers now perceive that Firm A is “in play” and may be sold if the right offer comes along.
1. In successful transactions, purchasers have typically paid 10 times current profits. How much would Firm A be worth to a buyer from outside the industry?
2. Would you expect that Firm B would be willing to pay more or less than an outside buyer?
3. What is the most Firm B would be willing to pay for Firm A?
Q
MC
FC
TC
Share
Market ?
FIRM ?
Price
Revenue
Profit
APT
10,400
$20
$50,000
8%
-0.4
BPT
15,600
$20
$60,000
12%
-0.4
Merged
26,000
$20
$100,000
20%
-0.4
a) Calulation of total costs, prices, Revenues, and profits Price (1/(1+e))*20 $33.33 Firm A Firm B Merged Firm 26000 33.33 866580 Volume Price Revenue Total Costs Variable Fixed 10400 33.33 346632 15600 33.33 519948 208000 50000 258000 88632 25.57 312000 60000 372000 147948 28.45 520000 100000 620000 246580 28.45 Profits Mark ups % b On erger the profits and the markup of companies on merged firm has improved due to the fact that there is reduction in the fixed cost in case of merger as the merged firm is enjoying economies of scaleExplanation / Answer
Suppose the Firm A demand the 10 times of the current profit then the buyer needs to pay that respective lump sum amount.
Let us see how much they need to pay to Firm A:
The present profit is $88,632. If it is 10 times to calculate then the value will be $88,632 X 10 = $886,320
So, this is the amount $886,320 needs to pay a local hospital/outside industry people to pay Firm A.
2. A Firm B is already giving a good competition to Firm A. If the Firm A is ready to sell then the Firm B has a good chance to acquire the Firm A in order to overcome the competition.
If the situation arises to acquire the Firm A then the Firm B should either pay 10 times of Firm A profit i.e $886,320 OR Firm B more amount ready to pay to compare the outside buyer amount(10 times of Firm A profit + Additional amount i.e $886,320 + some lump sum amount).
3. Yes, the Firm B willing to pay Firm A. Even, if we compare the profits and percentage value, the leading in between the two Firms is “Firm B”. If Firm B wants to acquire the market well then it is a best chance to buy the Firm A.
If we compare the revenue Firm A had $346,632 and Firm B had $519,948 the difference is $173,316.
If we compare the profits Firm A had $88,632 and Firm B had $147,948 and the difference is $59,316
If we compare the Mark ups %Firm A had 25.57 and Firm B had 28.45 and the difference in percentage is 2.88 %.
We have compared in 3 areas in above, in revenue, profits and Mark ups %, all the sections lead well by Firm B. So the Firm B here to better to purchase the Firm A so the Firm B can extend the market and get a good amount of profits further.