Firm A has a value of $100 million and Firm B has a value of $60 million. Merging the two would enable cost savings with a present value of $20 million. Firm A purchases Firm B for $65 million. How much do Firm A's shareholders gain from this merger?
A)$30 million
B)$20 million
C)$15 million
D)$5 million

Question

Quizplus · Accepted Answer

The total value of the merged firm is the sum of both firms' values plus the cost savings, which equals $100 million + $60 million + $20 million = $180 million. Firm A pays $65 million for Firm B, so the post-merger value of Firm A is $180 million - $65 million = $115 million. The gain for Firm A's shareholders is the difference between the post-merger value and the original value of Firm A, which is $115 million - $100 million = $15 million.

Firm a Has a Value of $100 Million and Firm