Sue's Bakery is planning on merging with Ted's Deli. Sue's will pay Ted's shareholders the current value of their stock in shares of Sue's Bakery. Sue's currently has 6,500 shares of stock outstanding at a market price of $26 a share. Ted's has 2,300 shares outstanding at a price of $18 a share. What is the value of the merged firm if the synergy created by the merger is $3,200?
A) $206,500
B) $210,400
C) $225,400
D) $213,600
E) $231,300

Question

Quizplus · Accepted Answer

First, we need to calculate the value of Ted's shares that Sue's will pay for:
Value of Ted's shares = 2,300 x $18 = $41,400

Next, we need to add the current value of Sue's Bakery's shares:
Value of Sue's shares = 6,500 x $26 = $169,000

The total value of the two firms before the synergy effect is:
Total value before merger = $41,400 + $169,000 = $210,400

Now, we add the synergy effect:
Total value after merger = Total value before merger + Synergy effect
Total value after merger = $210,400 + $3,200 = $213,600

Therefore, the value of the merged firm with the given information and synergy effect is $213,600. The correct answer is D.

Sue's Bakery Is Planning on Merging with Ted's Deli