Assume that you (Firm A) use the Free Cash Flow to Equity model. You are a negot

Question

Assume that you (Firm A) use the Free Cash Flow to Equity model. You are a negotiated merger. The synergy shareholders is $6,000. Firm A's market value of equity is $15,000 ($25 per share x 600 shares). Firm B's market value of equity is $8,000 $20 per share x 400 shares), If all the synergy gain goes to Firm B's shareholder, what is the stock exchange ratio of Firm A share for Firm B shares? Select one: O a" one Firm A share for 0.7143 Firm B shares O b. one Firm A share for 0.7341 Firm B shares Oc. one Firm A share for 0.8411 Firm B shares O d. one Firm A share for 0.6971 Firm B shares

Explanation / Answer

IF ALL SYNERGY GAIN GOES TO FIRM B, THEN THE VALUE OF THE FIRM B WILL BE = $8000 + $6000 = $14000

THEREFORE THE SHARE PRICE OF FIRM B = $14000/400 = 35

SO THE EXCHANGE RATIO WILL BE 35/25 = 1.4 SHARES OF A FOR EACH SHARE OF B

BUT WE ARE ASKED IN TERMS OF ONE SHARE OF A

SO ANSWER WILL BE : 25/35 = 0.7143

SO 1 SHARE FORM A = 0.7143 FIRM B SHARE

ANSWER : a. one firm A share for 0.7143 firm B share

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