The following data on a merger are given: $\begin{array} { l c l l }
& \text { Firm A } & \text { Firm B}&\text { Firm AB }\
\text { Price per share } & \$ 100 & \$ 10 & \
\text { Total earnings } & \$ 500 & \$ 300 & \
\text { Shares outstanding } & 100 & 40 & \
\text { Total value } & \$ 10,000 & \$ 400 & \$ 11.000
\end{array}$ Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.What will be the postmerger price per share for Firm A's stock if Firm A pays in cash?
A)$108
B)$110
C)$102
D)$114

Question

The following data on a merger are given: $\begin{array} { l c l l } 
& \text { Firm A } & \text { Firm B}&\text {  Firm AB }\
\text { Price per share } & \$ 100 & \$ 10 & \
\text { Total earnings } & \$ 500 & \$ 300 & \
\text { Shares outstanding } & 100 & 40 & \
\text { Total value } & \$ 10,000 & \$ 400 & \$ 11.000
\end{array}$ Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.What will be the postmerger price per share for Firm A's stock if Firm A pays in cash?
A)$108
B)$110
C)$102
D)$114

Quizplus · Accepted Answer

First, we can calculate the total value of Firm B's stock before the merger:
$10 × 40 = $400
If Firm A acquires all of Firm B's shares at $20 per share, they will need to spend:
$20 × 40 = $800
Adding this to the premerger value of Firm A gives:
$10,000 + $800 = $10,800
We know that the postmerger value is $11,000, so we can calculate the value of the combined firms after the merger that is attributable to Firm A's stock:
$11,000 - $400 = $10,600
We can divide this by the number of shares of Firm A to get the postmerger price per share:
$10,600 ÷ 100 = $106
However, since Firm A is paying in cash, they will need to subtract the $800 they are spending to acquire Firm B's stock from their total value after the merger:
$11,000 - $800 = $10,200
Dividing this by the number of shares of Firm A gives us the postmerger price per share when paying in cash:
$10,200 ÷ 100 = $102

The Following Data on a Merger Are Given Firm a Has Proposed to Acquire Firm B at a l