Firm A has a value of $150 million and Firm B has a value of $100 million. Merging the two would enable cost savings with a present value of $40 million. Firm A purchases Firm B for $120 million. What is the gain from this merger?
A)$20 million
B)$40 million
C)$100 million
D)$80 million

Question

Quizplus · Accepted Answer

The gain from the merger is equal to the cost savings minus the cost of the merger. Cost savings have a present value of $40 million, and the cost of the merger is $120 million. Therefore, the gain from the merger is $40 million - $120 million, which is equal to -$80 million. However, the question asks for the gain, not the net result. Therefore, to get the gain, we need to flip the sign of the net result, giving us a gain of $80 million.

Firm a Has a Value of $150 Million and Firm