Consider the following premerger information about a bidding firm (Firm B ) and
ID: 2794067 • Letter: C
Question
Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding.
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,600.
If Firm T is willing to be acquired for $20 per share in cash, what is the NPV of the merger? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
What will the price per share of the merged firm be assuming the conditions in (a)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
If Firm T is willing to be acquired for $20 per share in cash, what is the merger premium? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its shares for every two of T 's shares, what will the price per share of the merged firm be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What is the NPV of the merger assuming the conditions in (d)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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References
Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding.
Explanation / Answer
Solution:
A) Calculation of NPV of the merger:
The NPV of the merger is the market value of the target firm, plus the value of the synergy, minus the acquisition costs
= (1400 * 18) + 9600 + (1400 * 20)
= 62800
B) Calculation of price per share of the merged firm:
The Share Price of the merged firm will be the market value of the acquiring firm, plus the NPV of the acquisition, divided by the number of shares outstanding
= {(6200 * 48) + 62800} / 6200
= 58.13
C) Calculation of merger premium If Firm T is willing to be acquired for $20 per share in cash:
The merger premium = Premium per share * Number of shares of targeted firm outstanding
= (20 - 18) * 1400
= 2800
D) Calculation of price per share of the merged firm be:
New shares created = (Number of shares of targeted) * (Exchange ratio)
= 1400 * (1/2)
= 700 Shares
VBT = (Market value of the acquirer + Market value of the target + Synergy benefits)
= (6200 * 48) + (1400 * 18) + 9600
= 3,32,400
P = The value of the merged / Total number of new shares
= 332400 / (6200 + 700)
= 48.17
E) Calculation of NPV of the merger assuming the conditions in (d):
NPV = Market value of the target + Synergy benefits - Costs
= (1400 * 18) + 9600 - (700 * 48.17)
= 1081