Kelly Tubes is considering a merger with Reilly Tires.Reilly's market-determined value is $3.75 million,and Kelly's market value as a stand-alone company is $4.50 million.Both firms are all equity-financed.Kelly acquires Reilly for $4.25 million because it believes the combined firm value will increase to $9.25 million.What will be the synergy from this merger?
A)$0.50 million
B)$1.00 million
C)$4.75 million
D)$5.00 million

Question

Quizplus · Accepted Answer

The market value of Kelly as a stand-alone company is $4.50 million, and it acquires Reilly for $4.25 million, which results in a total value of $8.75 million. However, Kelly believes that the combined firm value will increase to $9.25 million after the merger. Therefore, the synergy from this merger is $9.25 million - $8.75 million = $0.50 million. Option A and C are incorrect because they do not correctly calculate the synergy. Option D is incorrect because it overestimates the synergy by including the market value of Kelly before the merger.

Kelly Tubes Is Considering a Merger with Reilly Tires