Consider the following premerger information about a bidding firm (Firm B) and a
ID: 2797607 • 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 $7,800.
If Firm T is willing to be acquired for $24 per share in cash, what is the NPV of the merger?
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 $24 per share in cash, what is the merger premium?
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.)
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
a. NPV of the Merger = Synergy - Premium
Premium = ($24 - $22) =$2 *1,100 = $2,200
NPV = $7,800 - $2,200 = $5,600
b. price per share of the merged firm be assuming the conditions in (a) =
Price per share = [(5,200 × $52) + (1,100 × $22) + $7,800] ÷ [5,200 + ($26,400 ÷ $52)]
= $302,000 ÷ 5,707.69 = $52.98
c. If Firm T is willing to be acquired for $24 per share in cash, what is the merger premium?
Premium = Target price - actual price * Shares Outstanding
Premium = ($24 - $22) =$2 *1,100 = $2,200
d. what will the price per share of the merged firm be?
Price per share = [(5,200 × $52) + ((1,100/2 )× $52) + $7,800] ÷ [5,200 + (1,100/2)]
= $306,800 ÷ 5,750 = $53.36
e.NPV of the merger assuming the conditions in (d)
NPV of the Merger = Synergy - Premium
Premium = ($52*(1,100/2) - $22*1,100) = $4,400
NPV = $7,800 - $4,400 = $3,400