If Firm A acquires Firm B and Firm B's shareholders are given the fraction x of the combined firm, then the cost of this merger is
A)Cost = (PVAB) - (x) PVB.
B)Cost = (x) PVAB - PVB.
C)Cost = PVAB - (x) PVA.
D)Cost = (x) PVAB - (x) PVB.

Question

Quizplus · Accepted Answer

The cost of the merger for Firm A is the value of the combined firm (PVAB) minus the value of Firm B (PVB) which is retained by the Firm A after the merger. Since Firm B's shareholders are given the fraction x of the combined firm, Firm A's share of the combined firm is (1-x). Therefore, the cost of the merger for Firm A would be (x) PVAB - PVB. Option B represents this equation.

If Firm a Acquires Firm B and Firm B's Shareholders