Jennifer's Boutique has 2,100 shares outstanding at a market price per share of $26. Sally's has 3,000 shares outstanding at a market price of $41 a share. Neither ﬁrm has any debt. Sally's is
Acquiring Jennifer's for $58,000 in cash. What is the merger premium per share?

Question

Quizplus · Accepted Answer

First, we need to calculate the total market value of Jennifer's Boutique and Sally's before the merger:

Market value of Jennifer's Boutique = 2,100 shares x $26 per share = $54,600
Market value of Sally's = 3,000 shares x $41 per share = $123,000

The total market value of the two firms is $177,600 ($54,600 + $123,000).

Next, we need to calculate the price that Sally's is paying for Jennifer's Boutique:

Price paid by Sally's = $58,000

To calculate the merger premium per share, we need to determine the value of Jennifer's Boutique based on the price paid by Sally's:

Value of Jennifer's Boutique = Price paid by Sally's - Market value of Jennifer's Boutique
Value of Jennifer's Boutique = $58,000 - $54,600
Value of Jennifer's Boutique = $3,400

Now we can calculate the merger premium per share:

Merger premium per share = (Value of Jennifer's Boutique / Number of shares outstanding) - Market price per share
Merger premium per share = ($3,400 / 2,100) - $26
Merger premium per share = $1.62

Therefore, the correct answer is B, $1.62.

Jennifer's Boutique Has 2,100 Shares Outstanding at a Market Price