Hanover Tires is being acquired by Better Tires for $85,000 worth of Better Tires stock. Hanover Tires has 2,600 shares of stock outstanding at a price of $32 a share. Better Tires has 7,500 shares outstanding with a market value of $29 a share. The incremental value of the acquisition is $2,200. How many new shares of stock will be issued to complete this acquisition?
A) 2,872
B) 3,016
C) 3,133
D) 2,931
E) 2,987

Question

Quizplus · Accepted Answer

First, we need to calculate Hanover Tires' total value:

$32 x 2,600 = $83,200

We know that the incremental value of the acquisition is $2,200, so Better Tires must be valued at:

$83,200 + $2,200 = $85,400

Since Better Tires' market value per share is $29, we can calculate the number of shares needed to reach $85,400:

$85,400 ÷ $29 = 2,948 shares

Now we need to subtract the shares Better Tires already has outstanding to determine the number of new shares to be issued:

2,948 - 7,500 = -4,552

Since this is a negative number, we made a mistake in our calculation. We should have subtracted Hanover Tires' current outstanding shares instead:

2,948 - 2,600 = 348 new shares

Therefore, the answer is D) 2,931.

Hanover Tires Is Being Acquired by Better Tires for $85,000