Firm X is being acquired by Firm Y for £35,000 worth of Firm Y equity.The incremental value of the acquisition is £2,500.Firm X has 2,000 shares of equity outstanding at a price of £16 a share.Firm Y
Has 1,200 shares of equity outstanding at a price of £40 a share.What is the actual cost of the
Acquisition using company equity?

Question

Quizplus · Accepted Answer

The initial cost of the acquisition with Firm Y equity is calculated as:
Number of Firm Y shares given for the acquisition = £35,000 / £40 per share = 875 shares

The incremental value of the acquisition is £2,500, which means that Firm X's equity is worth £2,500 more than the price paid for it. Therefore, the equity value of Firm X is:
Equity value of Firm X = Incremental value + Firm Y shares given for the acquisition
Equity value of Firm X = £2,500 + (2,000 shares x £16 per share)
Equity value of Firm X = £34,500

The actual cost of the acquisition is the equity value of Firm X, which is £34,500, plus any additional shares of Firm Y equity required to make up the difference:
Additional shares of Firm Y equity = (Incremental value / £40 per share) = 62.5 shares (rounded up to the nearest whole share)

Actual cost of the acquisition = Equity value of Firm X + Additional shares of Firm Y equity
Actual cost of the acquisition = £34,500 + (63 shares x £40 per share)
Actual cost of the acquisition = £34,500 + £2,520
Actual cost of the acquisition = £34,789

Therefore, the best choice is B, as this is the actual cost of the acquisition using company equity.

Firm X Is Being Acquired by Firm Y for £35,000