Firm Q is being acquired by Firm S for $30,000 worth of Firm S stock. The incremental value of the acquisition is $2,000. Firm Q has 1,900 shares of stock outstanding at a price of $15 a share. Firm S
Has 1,500 shares of stock outstanding at a price of $40 a share. What is the net present value of the
Acquisition given that the actual cost of the acquisition using company stock is $30,167?

Question

Quizplus · Accepted Answer

The first step is to calculate the value of Firm Q at the current market price:

Value of Firm Q = 1,900 shares * $15/share = $28,500

Next, we need to calculate the value of the incremental benefit:

Incremental Benefit = $2,000

Then, we can calculate the total value of the acquisition:

Total Value of Acquisition = Value of Firm Q + Incremental Benefit = $28,500 + $2,000 = $30,500

Since Firm S is paying $30,000 worth of stock, we need to calculate the number of shares of Firm S that will be issued:

Number of Shares of Firm S = $30,000 / $40/share = 750 shares

Finally, we can calculate the net present value of the acquisition:

Net Present Value = Value of Firm S Stock - Actual Cost of Acquisition
= (Number of Shares of Firm S * Market Price per Share) - $30,167
= (750 shares * $40/share) - $30,167
= $30,000 - $30,167
= -$167

Since the net present value is negative, the acquisition is not recommended as it will result in a loss to the Firm S shareholders. Therefore, the best choice is C, which is the only answer option that matches the calculated net present value.

Firm Q Is Being Acquired by Firm S for $30,000