The Cycle Stop has 1,400 shares outstanding at a market price per share of $10.80. Kate's Wheels has 1,750 shares outstanding at a market price of $13 a share. Neither firm has any debt. Kate's Wheels is acquiring The Cycle Stop for $16,500 in cash. What is the merger premium per share?

Question

Quizplus · Accepted Answer

To compute the merger premium per share, we need to find the difference between the price per share paid to The Cycle Stop shareholders and the market price per share before the merger.
 
The Cycle Stop's market value = 1,400 shares × $10.80 = $15,120
Kate's Wheels' market value = 1,750 shares × $13.00 = $22,750
Total market value before the merger = $15,120 + $22,750 = $37,870

The price per share paid to The Cycle Stop shareholders = $16,500 ÷ 1,400 shares = $11.79
The merger premium per share = Price paid per share - Market price per share = $11.79 - $10.80 = $0.99

Therefore, the merger premium per share is $0.99, or choice C.

The Cycle Stop Has 1,400 Shares Outstanding at a Market