The Glass Works has a market value of $336,000.Creative Pottery has 23,800 shares of stock outstanding at a price per share of $37.Creative Pottery is acquiring The Glass Works in exchange for 9,200 shares of Creative Pottery stock.The merger is expected to create $24,000 of synergy.What is the NPV of the acquisition?

Question

Quizplus · Accepted Answer

First, we need to calculate the value of the 9,200 shares of Creative Pottery stock that will be exchanged for The Glass Works. This is calculated as:

Value of Creative Pottery stock = Number of shares × Price per share
Value of Creative Pottery stock = 9,200 × $37
Value of Creative Pottery stock = $340,400

Next, we need to calculate the net present value (NPV) of the acquisition taking into account the synergy:

NPV = Value of The Glass Works + Value of Synergy - Value of Creative Pottery stock
NPV = $336,000 + $24,000 - $340,400
NPV = -$401

Since the NPV is negative, the acquisition is not financially attractive and is expected to decrease shareholder value. Therefore, the best choice is C, which corresponds to a negative NPV of $401.

The Glass Works Has a Market Value of $336,000