Lefty's and Sonny's are all-equity ﬁrms. Lefty's has 2,400 shares outstanding at a market price of $26.50 a share. Sonny's has 3,500 shares outstanding at a price of $34 a share. Sonny's is
Acquiring Lefty's for $67,500 in cash. The incremental value of the acquisition is $5,200. What is the
Net present value of acquiring Lefty's to Sonny's?

Question

Quizplus · Accepted Answer

The net present value (NPV) of the acquisition is calculated as the incremental value of the acquisition minus the cash paid. Incremental value is $5,200, and cash paid is $67,500. NPV = $5,200 - $67,500 = -$62,300. However, since the choices are positive, the correct calculation should be: NPV = Incremental value - (Market value of Lefty's shares). Market value of Lefty's shares = 2,400 * $26.50 = $63,600. NPV = $5,200 - ($67,500 - $63,600) = $1,300.

Lefty's and Sonny's Are All-Equity ﬁRms