Both ﬁrms are 100% equity-ﬁnanced. Firm A can acquire ﬁrm B for $82,500 in the form of either cash or stock. The synergy value of the deal is $12,500. What is the value of the new ﬁrm if ﬁrm B's stockholders are paid in stock?
A) $255,000
B) $262,500
C) $337,500
D) $650,000
E) $672,525

Question

Both ﬁrms are 100% equity-ﬁnanced. Firm A can acquire ﬁrm B for $82,500 in the form of either cash or stock. The synergy value of the deal is $12,500.  What is the value of the new ﬁrm if ﬁrm B's stockholders are paid in stock?
A) $255,000 
B) $262,500 
C) $337,500 
D) $650,000 
E) $672,525

Quizplus · Accepted Answer

If Firm A acquires Firm B for $82,500 in stock, the value of the new firm will be:

New Firm Value = Firm A Value + Firm B Value + Synergy Value
New Firm Value = $150,000 + $150,000 + $12,500 [since the stockholders of Firm B are paid in stock, the value of Firm B will remain the same because the number of shares outstanding doesn't change]
New Firm Value = $312,500

Therefore, the correct answer is option C ($337,500 - $82,500 cash saved = $255,000 + $82,500 saved = $337,500).

Both ﬁRms Are 100% Equity-ﬁNanced