Western Fronts is being acquired by Eastern Slopes for $30,000 worth of Eastern Slopes stock. The incremental value of the acquisition is $2,000. Western Fronts has 1,900 shares of stock outstanding at a price of $15 a share. Eastern Slopes has 1,500 shares of stock outstanding at a price of $40 a share. What is the net present value of the acquisition given that the actual cost of the acquisition using company stock is $30,167?

Question

Quizplus · Accepted Answer

The actual cost of the acquisition using company stock is $30,167, which is greater than the incremental value of $2,000.

First, we need to determine the total value of Western Fronts before the acquisition:
Total value = 1,900 shares x $15 per share = $28,500

Next, we need to determine the total value of Eastern Slopes before the acquisition:
Total value = 1,500 shares x $40 per share = $60,000

The incremental value of the acquisition is $2,000, which means that the actual cost of the acquisition includes $28,500 + $2,000, or $30,500 worth of Eastern Slopes stock.

We can now calculate the net present value of the acquisition:
Net present value = $60,000 - $30,500 = $29,500

However, we need to subtract the actual cost of the acquisition from this amount to get the net present value:
Net present value = $29,500 - $30,167 = -$667

Since the net present value is negative, the acquisition would not be a good choice for Eastern Slopes.

Western Fronts Is Being Acquired by Eastern Slopes for $30,000