Firm A is acquiring Firm B for $25,000 in cash. Firm A has 2,000 shares of stock outstanding at a market value of $21 a share. Firm B has 1,200 shares of stock outstanding at a market price of $17 a
Share. Neither ﬁrm has any debt. The net present value of the acquisition is $1,500. What is the
Price per share of Firm A after the acquisition?

Question

Quizplus · Accepted Answer

The total value of Firm A before the acquisition is 2,000 shares x $21 = $42,000.
The total value of Firm B before the acquisition is 1,200 shares x $17 = $20,400.
The total acquisition cost is $25,000 in cash.

After the acquisition, the total value of the combined firm is $42,000 + $20,400 + $1,500 = $64,900.

To find the new price per share of Firm A, we need to divide the total value of the combined firm by the number of shares outstanding after the acquisition.

The number of shares outstanding after the acquisition is 2,000 + 1,200 = 3,200.

Therefore, the price per share of Firm A after the acquisition is $64,900 ÷ 3,200 = $20.31.

However, we need to remember that Firm A has paid for the acquisition with $25,000 in cash.

So, the price per share of Firm A after the acquisition needs to satisfy the equation:

$25,000 ÷ (2,000 + x) = $20.31

Solving for x, we get:

x = 525

Therefore, the new total number of shares outstanding after the acquisition is 2,000 + 525 = 2,525.

Finally, the price per share of Firm A after the acquisition is:

$64,900 ÷ 2,525 = $25.75

Therefore, the best choice is C) $21.75.

Firm a Is Acquiring Firm B for $25,000 in Cash