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

Question

Quizplus · Accepted Answer

The gain from the merger can be calculated as the total value of the merged firm minus the cost of acquiring the target firm and the value of cost savings. 
Total value of merged firm = value of firm A + value of firm B - cost savings 
Total value of merged firm = $150 million + $100 million - $40 million = $210 million 
Gain from merger = Total value of merged firm - Cost of acquiring target firm 
Gain from merger = $210 million - $120 million = $90 million 
Therefore, the gain from the merger is $40 million.

Firm a Has a Value of $150 Million, and B