The bidding firm (Firm B) has 2,300 premerger shares outstanding at $43 a share. The target firm (Firm T) has 1,100 premerger shares outstanding at $24 a share. Assume neither firm has any debt outstanding. Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $2,600. What is the NPV of the merger assuming that Firm T is willing to be acquired for $26 per share in cash?

Question

Quizplus · Accepted Answer

The NPV of the merger is calculated as the value of synergistic benefits minus the premium paid for the acquisition. The value of synergistic benefits is given as $2,600. The premium paid is the difference between the acquisition price per share and the premerger price per share, multiplied by the number of shares. The acquisition price per share is $26, and the premerger price is $24, so the premium paid per share is $2. With 1,100 shares, the total premium paid is $2,200 ($2 * 1,100). Therefore, the NPV is $2,600 (synergistic benefits) - $2,200 (premium paid) = $400.

The Bidding Firm (Firm B) Has 2,300 Premerger Shares Outstanding