Firm V was worth $450 and Firm A had a market value of $375. Firm V acquired Firm A for $425 because they thought the combination of the new Firm VA was worth $925. What is the NPV from the merger of Firm V and Firm A?

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Quizplus · Accepted Answer

The market value of Firm V and Firm A prior to the merger was $450 and $375, respectively. The purchase price paid by Firm V was $425.

Therefore, Firm A was acquired at a premium of $50 ($425 - $375).

If Firm V believed that the combination of the two firms would be worth $925, then the additional value created from the merger would be $50 ($925 - $875, which is the sum of the market values of the two firms prior to the merger). This $50 represents the net present value (NPV) of the merger.

Firm V Was Worth $450 and Firm a Had a Market