Firms A and B, both all-equity financed, are merging. Prior to merge, Firm A, having 100 shares outstanding, is worth $15,000 while Firm B, with 50 shares outstanding. The combined firm will be worth $30,000. Firm A pays $11,500 in cash for Firm B. What is the net benefit of the merger to Firm A?
A) $3,500
B) $5,000
C) $11,500
D) $18,500

Question

Quizplus · Accepted Answer

The net benefit of the merger to Firm A is calculated as the difference between the value of the combined firm and the sum of the pre-merger values of Firm A and the cash paid for Firm B. The combined firm is worth $30,000, Firm A was worth $15,000, and it paid $11,500 for Firm B. Thus, the net benefit is $30,000 - ($15,000 + $11,500) = $3,500.

Firms a and B, Both All-Equity Financed, Are Merging