Lefty's and Sonny's are all-equity firms. Lefty's has 2,400 shares outstanding at a market price of $26.50 a share. Sonny's has 3,500 shares outstanding at a price of $34 a share. Sonny's is acquiring Lefty's for $67,500 in cash. The incremental value of the acquisition is $5,200. What is the net present value of acquiring Lefty's to Sonny's?

Question

Quizplus · Accepted Answer

The net present value (NPV) of acquiring Lefty's to Sonny's is calculated by subtracting the acquisition cost from the sum of Lefty's market value and the incremental value. Lefty's market value is 2,400 shares * $26.50 = $63,600. The acquisition cost is $67,500. The incremental value is $5,200. Therefore, NPV = ($63,600 + $5,200) - $67,500 = $1,300.

Lefty's and Sonny's Are All-Equity Firms