Firm A has a value of $200 million, and B has a value of $120 million. Merging the two would allow a cost savings with a present value of $30 million. Firm A purchases B for $130 million. How much do firm A's shareholders gain from this merger?

Question

Quizplus · Accepted Answer

Firm A purchases B for $130 million, which is less than the combined value of both firms ($320 million). Therefore, there is a gain of $190 million for the shareholders of Firm A. However, $30 million of this gain is from cost savings, so the net gain is $160 million ($190 million - $30 million). Since Firm A shareholders own 100% of the company, they will receive the entire net gain, which is $160 million. However, the question asks specifically for how much the shareholders gain, not the net gain, so the answer is $20 million ($160 million - $140 million, the original value of Firm A before the merger).

Firm a Has a Value of $200 Million, and B